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Gareth Morgan is very sceptical of the benefits of subsidising Hollywood and suggests a better arrangement with rent-seeking media moguls

Gareth Morgan is very sceptical of the benefits of subsidising Hollywood and suggests a better arrangement with rent-seeking media moguls

By Gareth Morgan and Geoff Simmons*

The Government has just increased the film industry rebate to 25% to secure production of the Avatar films for New Zealand.

Is this good economic management or politicians thinking big and being star struck by Hollywood spin?

The Government’s own advice suggests the latter.

According to Treasury the current scheme (a rebate of 15%) was found to cost more than the benefit it created.

Even under the most favourable assumptions they could conjure up, any benefit was small.

This dud result was put down to King Kong costing more than expected, without which the benefit for the subsidies to date would apparently have been slightly positive.

But who’s to say there won’t be another monkey on our back like Kong? Not everything that Jackson and Cameron have touched has turned to gold.

The Government’s response to this advice was rather counterintuitive: make the rebate larger. As Treasury pointed out, if you take a scheme that is barely working and make it more generous, you will make a worse loss.

How can the Government justify throwing other people’s money at businesses without any apparent benefits? Lets start by exploding a couple of the myths:

This is a rebate, without it the money wouldn’t be spent here – absolutely correct, but how many other global businesses are in the same situation and would invest here if the taxpayer coughed up $125m?

The only way to find out is to hold an auction – we’ll give you $125m, let us know what you’ll do for New Zealand? At least such a process would be contestable rather than the Prime Minister pontificating from on high that film is where it’s at.

In the light of a contrary view from his advisers, not only is that overly cocksure but it reeks of Muldoonist Think Big at its worst.

The film industry creates jobs – again so do all businesses. If people weren’t working in film, they would do something else. Subsidising film leads to us having more qualified people in this industry than we actually need, which will mean we need to keep subsidising to provide them with jobs… and so on.

Some of us remember the protected local vehicle assembly industry where each job was calculated to cost consumers $1 million.

Subsidies in any industry only ever delay facing up to economic reality and meanwhile create a workforce of dependents.

Government Ministers didn’t stoop to using any of these justifications, as they know how weak that reasoning is. They conjured up a new fantasy – producing film is different because the industry creates wider ‘spillover’ benefits that we can’t measure. Here is our PM:

So you know, with The Hobbits [sic] there was obviously tourism spinoffs. Avatar’s probably more about talking about and promoting ourselves as a high-tech environment…

One wonders why Mr Key bothers to spend $35m every year on getting advice from Treasury at all. Although they can be difficult to measure, the tourism impacts of Lord of the Rings were already included in the evaluation mentioned above that he rebutted. So remove those from the Avatar analysis and replace with economic benefit multipliers from the apparent enhanced “tech rep” that the PM knows and nobody else does – and ipso facto we have picked a winner.

Mr Key must think we all came down in the last shower if he expects anyone to believe that assertion. And his Economic Development Minister Steven Joyce (who with his boss’s help suddenly experienced an epiphany and turned from opposing further subsidies to backing this deal) waffled on just as vacantly:

Every now and again we have to put our hand up ... to show that we are worthy of the attention of the world.

As it stands we are spending $125m million on the Avatar films in exchange for a premiere and a section on New Zealand in the DVD box set. Do people even watch DVDs any more? Maybe we should have asked for a promo on the videotape version of the movie.

At the very least we should be negotiating an equity stake so that the country rebate decreases if the film is a true international hit.

This would at least give the subsidy a chance of turning up positive benefits for the country. This is the approach that the Government has announced for NZ based films – but was so desperate to keep in with Hollywood, dropped as a condition for the international ones too.

There is no doubt that this deal is great for Wellington, the Wairarapa which is now the playground of the Wellywood elite and all those sucking on the taxpayer largesse.

But the fact remains the decision has no defensible rationale, it’s a politician taking a punt with public money.

The ghost of Sir Robert has returned.


Gareth Morgan is a businessman, economist, investment manager, motor cycle adventurer, public commentator and philanthropist. This opinion piece was first published on his blog and is reprinted here with permission.

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The 25% rebate is exactly the right amount, 24 would clearly be too little and 26 would have been profligate. No...once again John Key has shown himself to be a master negotiator. This 25% rebate is right on the money. By the way does anyone actually know how it works- the rebate I mean, not the whole lobby government to get your hands on other peoples money, I understand that bit. But I have not read how the rebate works?

Details do seem to be a bit thin on the ground. Not 100% sure on this, but thought i read somewhere that this is a straight cash grant if the production company guarntees to spend over a certain amount.

And what jobs, would these people not connected to movies and supporting industries, take on?

No manufacturing.  How many makeup and video production people do we need with no movie industry. Very little contact and flow on work for the "talent" in NZ.   Thousands of small providers for lots of high premium niche objects that are only ever coming to their own in movies. (how often do you need a lifestyle fibreglass horse, where do you think barrels and set materials come from Gareth?  From NZ and NZ niche manufacturing!! that's where.
Perhpas the movie workers could find work in cafes (to tourists? coming for??)  or perhaps they need to get macJobs in the high paying fastfood industry.  Or real estate licenses and they could all sell houses to each other.

I don't know what market's your business competes in Gareth.  But it must be a pretty smooth saleing if you don't have to haggle for your big customers....

Exactly cowboy, once you start down the subsidy gravey train you have to kept it up forever otherwise they'll be out of work.
Why don't we pay C.A.F. $125M to assemble aucklands new trains locally?  That would probably employ more people than this film deal.

Assemble trains locally?  They'd have to admit that forcing the Dunedin train/carriage manufacturer out of business was a bad idea.

That's ppart of the big picture for multinationals.  They have such a size and impact on local trade figures and skills that they have bidding power with naive governments.  They (the multinationals) are well versed and have full time staff employed to maximise what they can get out of a government.    Multinational can also include union lobby groups.

The only way to bet them is play local and play hard.  Something NZ government has been totally out of their depth.    Letting competition in via OIO to take advantage of any home game, bidding high when buying the big projects, not sponsoring and mentoring their own people to retain skills and advantage.       All the things that spell diaster for business.?
Believing their own propoganda.
Using their financal/fiscal power to force workforce into preconceived notions, rather than attempting to capture value (and thus economic power) within the culture & population. (eg not finding ways to encourage advantage during boom times, instead using the stick to whack any growing, tall poppies)

Gareth/Simon what value are you placing on the primary advertising of "brand NZ" (ie putting NZ 'on the map' for common folk though the movie going world - ie those with disposable income enough to watch famous movies)