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Offshore Petroleum Amendment (Miscellaneous Measures) Bill 2007 Tax Laws Amendment (2007 Measures No. 5) Bill 2007 Trade Practices Amendment (Small Business Protection) Bill 2007

CHAIR —We will resume these hearings. We are still discussing schedule 10. I welcome Mr Richard Harris, the CEO of the South Australian Film Corporation. Mr Harris, have you appeared before parliamentary committees before?

Mr Harris —Yes.

CHAIR —So you are aware of the normal discussion the chair has with witnesses about proceedings?

Mr Harris —Yes.

CHAIR —Mr Harris, if you would like to make an opening statement then please do so.

Mr Harris —Thank you for the opportunity to appear today. The SAFC is the South Australian government’s lead agency for the development and growth of the screen industries in South Australia. It invests in the development and production of feature films, documentaries, television programs, animations and digital interactive projects. Following the announcement of the film package in the May budget, the SAFC consulted with key industry members in South Australia to gauge their responses to the new proposals. The views of the industry were then communicated to the South Australian Premier, Mike Rann, who subsequently wrote to Minister Brandis. The Premier’s letter noted that the South Australian production sector, and consequently the South Australian government, were broadly supportive of the new package but outlined some particular concerns regarding some of the details contained within it. The letter highlighted four key areas: the threshold for feature films set at $1 million of QAPE, or qualifying Australian production expenditure, which was seen as problematic; the QAPE threshold for documentary, which was set at $500,000, was also too high; the certification process was flawed because it required financing to be in place prior to application for certification; and, finally, the emphasis on the guaranteed theatrical distribution for feature films was inflexible and did not take into account the new realities and digital exhibition pathways for feature films in the new digital landscape.

The letter included an attachment from the production sector in relation to those issues that DCITA had indicated it wished to get some direction on. Key recommendations of the submissions were as follows: firstly, that only independent producers as defined under the Australian content standards should be eligible for the rebate; secondly, that QAPE thresholds should be lower for all forms of production; and, thirdly, that QAPE should include both freight and insurances, including completion bonds, as these are all bona fide costs of doing business in the film sector. The recently announced changes to the film package address a number of the issues that were raised in the Premier’s letter, in particular the thresholds for documentary and TV drama and the changes to the certification process which now mean that bona fide development expenses will be allowed. These have been accepted. These are not minor changes and the SAFC welcomes them. The SAFC also welcomes the fact that there is now clarity about how the Australian content test is going to be administered in the future. The SAFC is very comfortable with a 10BA style test for Australian content.

However the SAFC is still concerned that the threshold for feature films remains at $1 million. This threshold would have excluded films like, for example, The Castle and possibly films like Kenny and 2:37—a South Australian film which was selected for Cannes in 2006. These films might have just fallen short of the proposed threshold. There are also concerns about the short film animation QAPE threshold, which has remained at the original level. While the SAFC welcomes the inclusion of freight as a qualifying expense, it maintains that insurance should also be included. Finally the SAFC remains of the view that the new offset announced by the minister should only be available to bona fide independent producers. In this regard the SAFC wishes to express its support for the submission of the Australian Screen Council. On this last matter I wish to make some specific comments as it appears that some of my comments in the media have been used by FreeTV as part of their submission to this committee. While I do not resile from the comments, which I believe are included in an appendix, I wish to make it clear that I believe there are compelling reasons for broadcasters to either be excluded from gaining access to the production offset or, if they are not excluded entirely, the programs that are being made as part of their statutory obligations should be. My view is that if broadcasters gain access to the offset then they will effectively be receiving a government subsidy to meet their content obligations. This is why I believe that there is some merit in the idea of only allowing broadcasters to claim the rebate when the program does not count towards their content obligations, particularly their sub quota obligations in regard to drama, documentary and children’s programming.

However, it is my view that, whether or not the broadcasters are able to access the rebate, the major concern remains. That is the extent to which broadcasters dealing with independents in the future will be able to use their market power to coerce producers to hand over their rebate as part of their commercial dealings. In other words, the rebate, which was supposed to be about building equity and sustaining businesses, could be lost. If this is the result, the introduction of an offset for TV production could well end up being a pyrrhic victory for the independent sector. Ultimately, I guess this is probably an issue more for the ACCC and the Trade Practices Act; however, I am pleased to see that the minister has clearly identified it as an issue to monitor over time. That is my opening statement. I am happy to take any questions.

CHAIR —Thanks, Mr Harris. You made some comments recently on The Media Report on Radio National. You said:

I don’t think they are going to suddenly change their business models, the way that they produce programs, because they suddenly can get access to 20%.

The interviewer said:

So they won’t be moving towards going back to doing more in-house?

You said:

I doubt that that would be the case, that they don’t suddenly look at this 20% and suddenly decide to shift their entire business model on the basis of that; I just don’t think it’s enough. And it’s also important to bear in mind that organisations like the one I currently work for, the South Australian Film Corporation, will be continuing to have the same sort of guidelines.

Is it still your position that you do not think that there will be a sudden shift to in-house, as indicated in the ABC report?

Mr Harris —No, I don’t. My view is that I am not convinced that that would be enough for them to change their model. I guess the question is: in five years time, if they did, what would be the view of government? Would that be the actual outcome that government was looking for? My view is that it would not be a great outcome. My view is also that it is an unlikely outcome, but I think it would be something that the government would be concerned about if it was an outcome.

CHAIR —The argument from screen producers and others has been premised on their belief that there will be a significant shift away from the independent sector back to in-house. You obviously disagree with that. On what basis do you believe that broadcasters should be excluded? If the fundamental premise of the counterargument is one that you do not agree with, on what basis do you think that broadcasters should be excluded?

Mr Harris —I think, as I have outlined, that there is an in-principle argument that is about the extent to which a broadcaster that has a privileged access to a public resource is then able to use a government subsidy to fund the obligations that they have in order to use that public resource. From an in-principle point of view, that does seem to be an anomaly. It is a little bit like a double-dip, as far as I am concerned. I think that there is enough of an argument, beyond the fact of whether they would actually bring everything in-house or externally produce, to warrant a look at what the broadcasters are actually doing and what they should be allowed to access in order to do that.

CHAIR —What access are you referring to?

Mr Harris —Access to the rebate. If they were able to access the rebate, they would essentially be getting two parts of a government offering. They would be getting the rebate and they would also be getting privileged access to what is really one of the last protected markets in the country.

CHAIR —What privileged access?

Mr Harris —The broadcasters get privileged access to spectrum. No-one else is allowed to have it; they have to get licences. It is one of the few remaining purely protected markets. In order to get access to that privileged spectrum, the quid pro quo is to do Australian content. For me, that is the equation. They are then saying, ‘We will do that, but we also want to get the government subsidy to assist us to do that.’

CHAIR —Thank you for clarifying your position on that.

Senator MURRAY —There is an additional leg to that argument that an economist would throw in, but I do not know if the reality will fit the theory. What the economist will say is that, where a restricted facility is provided, those who benefit from that are able then to charge or achieve monopoly rents—in other words, excessive profits.

Mr Harris —Yes.

Senator MURRAY —In return for receiving those excessive profits, the government has laid on what are essentially customer service obligations. Is it your view that those who are licensed do in fact generate far higher profits than if it were an open and competitive industry and, because they get those higher profits, they therefore do not warrant further subsidy? Is that accurate?

Mr Harris —Pretty clearly that would be my position. Absolutely. The problem you have is that Australian content is the expensive end. If you wish to buy American content you can buy it much cheaper than the Australian content, so they are the obligations that you put on those stations in order to maintain that monopoly.

Senator WEBBER —Thank you for your earlier explanation. I am finding this issue more and more complicated the more I listen, although that has helped me to clarify a number of points. If we accept what has been put to us by the independents as the worst-case scenario, with your knowledge of the industry—bearing in mind that we seem to deal with tax bills every second month at the moment; there is always a tax law amendment bill somewhere—if we promise to keep this under review, how long would it take for us to see those adverse outcomes, so that then perhaps we could review it and rectify the situation?

Mr Harris —It would be hard to tell. I think FreeTV this morning referred to Project Blue Sky and the New Zealand decision. There was some concern about how that would pan out. It is now 10 years down the track and there has been very little impact from that. I would imagine that if the government turned around in three to five years and found that there was clear evidence that broadcasters were bringing production in-house, that would be enough to consider it. That is the sort of time frame. How quickly those broadcasters are looking at using this offset and changing those strategies will probably take something of that order. Whether they bring stuff in-house or they continue to externally commission, my concern is more about the pressure that they are going to be using with those independent producers. The intention was for this offset to provide some additional equity for those producers. Whether they will be able to hold onto that to build their businesses is a very different question. The minister has indicated that that is something that they want to keep a view on. I think that that is an important thing to monitor—again, within three years—to see the extent to which they have been able to build those businesses on that.

CHAIR —I think there is de facto acknowledgement from FreeTV that, effectively, equity probably would not remain with the independent producers. They were indicating that if the costs were reduced then they would be looking to commission more local content production. I would presume that the only way that costs could be reduced would be if the equity of the independents were reduced accordingly. There seemed to be a de facto acknowledgement of that.

As you said in your interview on the ABC, it is a huge shift in the business model for Channel 9 and Channel 10 to reverse what has been a corporate decision of some time to not have these in-house productions. So it would be pretty obvious, I imagine, if those two were starting to move in-house. It would probably be a little more difficult to ascertain with Channel 7, but with the other two I imagine it would be pretty obvious pretty quickly, wouldn’t it?

Mr Harris —I would have thought so.

Senator BERNARDI —What is the fear? Is it about job losses within the industry? If there was greater production in-house by the major networks, wouldn’t it see a transfer of skills from one particular employer to another?

Mr Harris —The overall industry view is not about job losses. As you can imagine, if the quantum is increasing or staying the same, there are the same levels of employment whether you are working for an in-house or an external commissioned program. I think the issue is more an in-principle one about a sustainable, independent sector which exists outside of the broadcasters and is able to create programs, sell them to broadcasters here and overseas, and the extent to which they are able to build their businesses and not be merely outsourced service providers in a very limited way. The idea—and one of the things the industry grabbed onto with this proposal—was very focused around these businesses and the ability to maintain ongoing production. Clearly, the broadcasters in Australia will for the foreseeable future be the key drivers, but the future is one in which the role of the broadcasters is declining. The ways of being able to get projects out to the world through the internet and other means are increasing. The capacity for an independent sector to build for this future using these rebates—they are talking now to the broadcasters, but in the future who knows who they are going to be talking to, who they are going to be doing business with—was what the industry was looking towards when they were talking to the government. You can see that the broadcasters’ audience is fragmenting and advertising is disappearing to the internet and to a whole range of other areas where you are getting programming from. Within the context of all that, it is more about how you build an industry based around not just employment but intellectual property and licensing. My concern is that the broadcaster—and I am not sure what mechanisms you put in to deal with it—are going to be saying: ‘Here’s that 20 per cent. We are going to swap it for exactly what we wanted before but we also want that 20 per cent.’ That is just the market power that they continue to have.

Senator BERNARDI —I asked before about whether—adding this figure now—a billion-dollar movie house or a TV house that is not a broadcaster is classified as an independent, and the answer is: yes, it is. It kind of says that it is not the little guy versus the powerful oligarchs, or whatever was presented before. There are these very powerful, independent operators that exert a lot of influence in distribution, not just through broadcasting. Do you then extend this to who owns broadband capacity? If one company controls broadband, are they then a broadcaster—they are not under the definition—if movies and content are going to be downloaded from the internet like they are now? You can get Desperate Housewives—I don’t watch it, but you can—from the internet.

Mr Harris —The question is: if a Google Australia decided to get involved in production, is that an independent because it does not own a broadcaster, despite the fact that it has probably got more resources than Channel 9?

Senator BERNARDI —Or Warner Brothers or any of these movie houses.

Mr Harris —Or Village Roadshow or someone like that. Absolutely. I think that the idea of what constitutes an independent is clearly one which is constantly prone to pressure and is a grey area. I think an important principle is the capacity of companies which are outside those kinds of vertically integrated structures to maintain and create a future for themselves. Someone could create a Kennedy Miller—which ended up making Happy Feet—that is a production company that can get into the business of production and continue to develop a critical mass of production. The previous system was too focused probably on a film-by-film kind of production model, which is why most of the broadcasters did not use 10BA and 10B—the question you asked before. Those tax measures were very much project by project, whereas this new system is a business rebate system and it is about investing in your business. My hope for the rebate system is that in five years time we have created one or two Kennedy Millers or whoever they might be—those sorts of companies that are in the ongoing business of production, not necessarily having to be tied to having a vertically integrated structure. That was the hope of the new system.

Senator BERNARDI —Given that you are hoping to build a sustainable industry, or hoping this will support a sustainable industry that is going to continue to roll out content, is there a risk? And given the almost insatiable demand for content via the internet, pay TV and free to air, is there a risk that we are going to see a decline in the quality of Australian production, because of the pressures to continue to pump it out?

Mr Harris —There is always a pressure for us to do it. I hope you don’t mind my language, but if they are going to be making crap I would prefer that we made some of that crap as well. Overall, there is going to be ongoing pressure for broadcasters and others to bring costs down, but funnily enough, just when I thought we had almost seen the end of the quality Australian production, a Sea Patrol comes along where the production costs are actually higher than any other production in Australian history. So you suddenly see a production where the broadcaster is clearly putting a ring around it and saying, ‘We are the home of quality production.’ I think there are pressures going both ways.

Senator BERNARDISea Patrol is an interesting point, because it is an independent production, isn’t it?

Mr Harris —Yes.

Senator BERNARDI —And yet we were told earlier that 80 per cent of the development costs were met by a television network.

Mr Harris —I am not sure I can really comment on those development costs. They did seem rather high—

Senator BERNARDI —It is a high-quality production.

Mr Harris —If it is a high quality production, I would like to know where all those costs go. Eighty per cent of the development costs, certainly—how much they are putting into the production costs I do not know either. A chunk of those production costs are actually being put in by the Film Finance Corporation, and I am not sure what international sales have been like.

Senator BERNARDI —Do you see that it is very hard to reconcile that and say, ‘That is an independent production,’ when the only reason it is actually going is because it was funded by a broadcasting network, whether it is 80 per cent or what. A million dollars is a lot of money for development. It is hard to say, ‘Oh, yes, it is independent’.

Mr Harris —That is right. In some ways it does look like a dependent producer rather than an independent producer. But it is a model where, even in the UK—where they have independent producers—the broadcaster will come in, for the production budget, with somewhere close to 100 per cent. But they also have regulations which say the sorts of rights that that producer must control or can control and then take to sell to the rest of the world. Australia is in a very difficult position because, as we heard in the 1990s when all of the broadcasters were going broke, the licence fees were dropped very low and they have essentially not increased since that time. So the contribution of the broadcasters to the budget has stayed relatively static.

Senator BERNARDI —It was not only broadcasters that were going broke in the 1990s, though. Circumstances were pretty tough.

Mr Harris —Sure, but that is what happened. The licence fees were brought very low, and since that time the licence fees have stayed low. The producers have been expected to meet the gap and effectively deficit finance in the hope that they will make international sales to cover that.

Senator BERNARDI —Is it true that it is 25 per cent or 30 per cent? That is what we were told earlier. The licensing fee for a domestic free-to-air TV program will pay 30 per cent of their production—

Mr Harris —Something like that. There is a big gap for the producer to somehow fill. The idea, we thought, when we heard that there was going to be something like a TV rebate or an offset, was that that 20 per cent would help to fill that gap. The question is the extent to which that actually turns out to be a reality or not. That is the thing I am concerned about.

CHAIR —Mr Harris, we have this conundrum, haven’t we? In its broadest sense this offset has been designed not only to provide some equity but to expand independent—

Mr Harris —Yes, to increase production.

CHAIR —Yes, and not necessarily tied to the role or otherwise of the broadcasters. They are part of it but, from what evidence you have given us, the hope is that this will expand into international markets et cetera. There may well be some broadcast exposure in that—I am sure there probably is—but, for the sake of the argument, we are talking about the domestic side. Is there a risk of getting too tied up with the relationship with the broadcasters and the potential for them to bastardise, for want of a better word, the system with the offset and of not having enough focus on the potential for the growth of the industry?

Mr Harris —Of the industry overall?


Mr Harris —My view is that probably overall, and even with the broadcasters overall, this will increase the pie and that the independents will probably have an increase overall as well. The real question is this. I would certainly have no problem if the broadcasters were taken out. But as to if they were included, I think that a lot of the changes that actually went through, the ones I mentioned before, have actually outweighed the problem of the broadcasters, in my view. The real problem with the broadcasters is how you manage to continue to support the independents who are continuing to deal with the broadcasters to actually have something that allows them to not be so dependent on the broadcasters.

CHAIR —Which ostensibly this is designed to do?

Mr Harris —One would hope so.

CHAIR —As there are no further questions, I would say I have found that very interesting. It was, dare I say, an independent assessment of the issues—and without any offsets too, Mr Harris, which is even better news. I thank you most sincerely. That was very interesting.

[2.31 pm]