How NZ taxpayers forked out $575 million for Hollywood to film here

NZ Herald Staff,
Publish Date
Sat, 30 Jun 2018, 6:42AM
To understand Wellywood is to understand the ecosystem of companies that revolves around planet Jackson. Cartoon / Rod Emmerson
To understand Wellywood is to understand the ecosystem of companies that revolves around planet Jackson. Cartoon / Rod Emmerson

How NZ taxpayers forked out $575 million for Hollywood to film here

NZ Herald Staff,
Publish Date
Sat, 30 Jun 2018, 6:42AM

International star Scarlett Johansson made local headlines last year when she stopped for a slice of chocolate cake at Lower Hutt cafe Zany Zeus.

While that Moera cafe enjoyed the crumbs of a brush with stardom by becoming world famous in New Zealand, production company Dreamworks - who'd brought Johansson to the capital to spend six months working on Ghost in the Shell - arguably came out ahead.

The international production was one of dozens to come to New Zealand - mostly Wellington - over the past eight years, drawn to the hub of film expertise on the Miramar Peninsula and to film subsidies offering an up to 25 per cent rebate on the cost of silver screen productions.

After incurring $122 million in costs here during production - likely including most of Johansson's reported $12m salary - Dreamworks qualified for the maximum subsidy available and was able to bank $30.6m from New Zealand taxpayers.

This carrot, according to a long-delayed government report on the subsidy scheme, is what lured the production to Wellington from its initially-planned location of Berlin.

Johansson plays The Major in Ghost in the Shell. Photo / Supplied
Johansson plays The Major in Ghost in the Shell. Photo / Supplied

Act leader David Seymour isn't willing to dance around this issue of whether subsidising Hollywood's costs - including for their celebrity starlets - is worthwhile: "I think New Zealanders can decide for themselves whether they feel good about likely having given Scarlett Johansson $3m."

The escalating subsidy scheme was a "race to the bottom," and the fruits of the high-profile film industry was a modern form of bread and circuses, Seymour said.

"Every dollar spent on subsidies is a dollar that can't be spent elsewhere. Who amongst us believe politicians are the wisest at investing our dollars?"

The subsidy scheme, an evolution of ad hoc tax credits scripted in the late 90s to facilitate Sir Peter Jackson's groundbreaking Lord of the Rings adaptation, has seen nearly $600m paid out to international film and television producers since 2010 - including $161m for the same director's follow-up Hobbit trilogy.

An otherwise boosterish recent government evaluation of the latest iteration of the subsidy scheme, released yesterday, found $177.1m in grants paid out over the past three years resulted in a significant economic boost for the country but only generated $126.9m in additional tax revenue, costing the government $50m.

The enabling of Lord of the Rings - a rare series of films that earned blockbuster money but won Oscars like they were arthouse - opened a Pandora's box office in New Zealand and made Sir Peter Jackson the man he is today.

According to Forbes he is now worth $630m, and according to Google Trends he is still more famous internationally than Jacinda Ardern. He has been able to meet prime ministers, nudge reform of labour laws, and champion a domestic film industry in Wellywood that has created a counterweight to the century-old film industry on California's coast.

Following Lord of the Rings' success, the Government set up the first iteration of its subsidy scheme in a bid to turn New Zealand into the Hollywood of the South Pacific.

As the scheme has grown, so has Wellywood. And this symbiosis shows no sign of slowing down.

Director James Cameron, the man behind Titanic, Aliens and Avatar, was on hand for the 2013 announcement increasing subsidy rates to 20 per cent - 25 in special cases.

The Herald understands the package was largely aimed at the Canadian director's mega-budget Avatar sequels, set on the fictional world of Pandora, which will almost certainly qualify for the higher rate aimed at productions offering significant national benefits.

The sequels comprise up to four films, at last report, the first two of which have already begun shooting in Wellington. Based on Hollywood inflation, these productions stand a good chance of costing upwards of $1b, triggering hundreds of millions of dollars in further subsidies.

Tightening the criteria

While Seymour put a firm foot forward in opposing the decades-old scheme, Grant Robertson, the Minister of Finance but perhaps more saliently member for Wellington Central - the location for two-thirds of the country's subsidised film production - was keen to stay light on his feet.

Robertson wasn't willing to weigh in on whether ScarJo was worth it, but said criteria letting productions qualify for the maximum subsidy had "been tightened in recent years".

Not that Robertson wants this tightening to slow down the tempo, or suggest - as his predecessor Steven Joyce did when expanding the scheme in 2013 - that subsidies were a short-term measure to build sustainability.

"I think it's an area we want to be in. There are obviously always limits to how much you put in - what the scale of any subsidy scheme might be - but from my perspective, New Zealand has done well, produced good people, and this is part of being in that particular industry," he says.

This particular industry is, in practical terms, Wellywood - a cluster of companies in Wellington's Miramar connected with the rich-listed, Oscar-winning, knight of the realm Jackson. According to government figures, two-thirds of all large-budget screen productions take place in the capital.

Jackson, and other key players in Wellywood, such as fellow knight Sir Richard Taylor, declined to be interviewed by the Herald, but later provided written statements as reporting for this series progressed.

The group has a well-entrenched, and still-growing, footprint in the capital. Swathes of the peninsula next to the airport have been taken over for the business, and spin-off businesses, of moviemaking. Wellington's airport is festooned with giant eagles, blinking dragon heads and a giant "Middle of Middle-earth" sign.

Sigourney Weaver's Navi Avatar in the movie Avatar. The sequels are to be shot in Wellington. photo / Supplied
Sigourney Weaver's Navi Avatar in the movie Avatar. The sequels are to be shot in Wellington. photo / Supplied

Wellywood has meshed itself with no fewer than three museums in the capital - the Great War Exhibition at the old national museum building, a Gallipoli exhibit at new national museum Te Papa, and stalled discussions with the Wellington City Council over a purpose-built building to display Jackson's movie memorabilia.

It was only a spontaneous public cringe in 2010 that stopped airport owner Infratil from building a giant Wellywood sign on the hills overlooking the city.

Planet Jackson

To understand Wellywood is to understand the ecosystem of companies that revolves around planet Jackson. There are outlying satellites and planetoids, mostly a belt of television producers based in Auckland, but the real centre of gravity is found on the Miramar Peninsula where the big business is drawn to Weta.

The Weta Group includes a suite of companies that collectively offer everything a big-budget film-maker might need.

There's the high-profile Weta Workshop, a bustling props, prosthetics and merchandise factory that employs 330 people, includes dedicated 3D printer monitors and the country's sole swordsmith and now runs its own tourism division, Stone Street Studios. It's effectively a $40m commercial real-estate company that rents out vast sound stages for filming and former car factories for storage; a substantial post-production facility and an industry equipment rental firm.

But Wellywood's real engine room is Weta Digital, a special effects company that employs 1650 people - approximately 80 per cent of Wellywood's workforce and representing a significant chunk of the national film industry - built around a server farm in an old record pressing factory that the company likes to describe as the world's largest dedicated visual effects supercomputer.

Some of the Academy Award Oscars and Baftas adorning the Weta Workshop boardroom. Photo / Mike Scott
Some of the Academy Award Oscars and Baftas adorning the Weta Workshop boardroom. Photo / Mike Scott

Racks of processors sit in a room nearly 15C warmer than outside in the Wellington winter, but the company isn't wasting their seven-figure power bill on heating.

A large chunk of the power usage of Weta Digital - equivalent to that used by about 1000 domestic households - is dedicated to cooling the hard-working machines churning out 48 frames of 4K special effects for each second of on-screen footage.

It's largely off the back of Weta Digital that Miramar has become cosmopolitan. The company's HR manager, Brendan Keys, says a quarter of his nearly 2000-strong staff are on work visas, with another large slice born offshore but who have now naturalised.

David Wright, the chief operating officer of Weta Digital - a former accountant clearly familiar with bottom lines - makes no bones about what has enabled his firm to double in size since he joined nearly 10 years ago.

The company deals directly with Hollywood studios which now - thanks to Wellywood rivals in Australia, Canada, the United Kingdom and local governments in the United States keen to poach business from California - have a surfeit of choices when deciding who should animate Avengers nemesis, mad titan Thanos, in Infinity War.

"We have a small group of very savvy and powerful clients and so we have quite limited leverage on those relationships."

A subsidy, or incentive regime, is a necessity to get a look-in, he says. "It's just an expectation from all those clients. It's the first headline percentage they look at, rightly or wrongly."

Weta Digital is also one of the largest recipients of funding from Callaghan Innovation, a state-owned agency which aims to help smart businesses grow faster.

It received an announced $30m over the past decade. Wright says the sum eventually paid out is closer to $20m - the grants being tied to spending - and more a reflection of the firm having one of the largest private-sector research and development teams, numbering 200, in the country.

Analysis of the film rebates payout shows Jackson-connected firms work on 80 per cent of qualifying productions by value.

If Wellywood gets the lion's share of the big-dollar Hollywood productions, Jackson is the undisputed king of this pride.

He owns three-quarters of the Digital business, is a one-third partner in Workshop, shares the Stone Street Studios business with Taylor, and is the sole owner of production firm Wingnut Films.

'Never about money'

Jackson has the biggest slice of the Wellywood service business. Combined with the creative earnings for him and partner Fran Walsh from directing, writing and producing the end-product - this has made him one of the New Zealand's richest, and arguably most powerful, men.

Jackson's spokesman said he was too busy in post-production on multiple projects - notably the upcoming Mortal Engines - to answer questions in an interview. But in a written statement he said founding Wellywood was never about the money.

"If our goal had been to maximise profits we would not have chosen to set up a film industry in Wellington."

He also makes the point of only receiving an indirect benefit from the more than half-billion dollars spend in the past eight years.

"The incentives offered by the Government do not fund Peter Jackson, or our companies - not one cent comes to us. They provide a rebate to the studios that fund the movies shot here.

"At least the current incentives allow us to compete with all the other countries that understand the economic value of their film industries."

Act Party leader David Seymour says Kiwis can decide whether it was worth paying Johansson $3m. Photo / Greg Bowker
Act Party leader David Seymour says Kiwis can decide whether it was worth paying Johansson $3m. Photo / Greg Bowker

The director cited Australian studies - used to argue for further-increased support for the film industry across the Tasman - showing they led to taxpayers breaking even.

"This is not a debate about whether government incentives are a good or bad thing - if no other countries provided incentives to their film industries we'd be on a level playing field, and we wouldn't be having this debate."

Michael Thom, an associate professor in public policy at the University of Southern California, says the debate is reaching a crescendo and New Zealand - and Jackson's outsized place in the industry - makes for an interesting case study in how the international market for film productions has pushed subsidies ever-upwards.

"New Zealand incentives are used as an excuse, or a justification for other governments - including state government - to continue offering more. It's almost like a race, a very costly race, to the top," he says.

"A lot of it is arrayed around his [Jacksons'] status as a celebrity director. He becomes this symbol, and when there's no counteracting symbol to say 'these things aren't working' to sway the public imagination, they'll persist."

Thom said his own review of literature had found state support for the film industry resulted in as little as 10 cents in the dollar being returned to taxpayers and the silver screen seemed to be in a privileged position.

"Very few people would tolerate this level of subsidy for another other industry. Can you imagine doing this for oil companies? Banking? There'd be riots in the street."

The Hobbit Law

The only time riots have been in the offing was during the fractious debate preceding production of The Hobbit. Alarm over the implications of an employment law ruling saw Sir Richard Taylor leading marches in the street, raising the spectre of the billion-dollar film project moving offshore if law changes ensuring film workers were classed as contractors weren't passed.

Then-Prime Minister John Key entered into direct negotiations with Warner Brothers producers, resulting in policy changes that saw subsidy rates boosted and employment legislation replaced with a union-busting replacement now known as the Hobbit Law.

A working group tasked with repealing this law, led by lawyer and former broadcaster Linda Clark, is expected to provide recommendations to ministers in the next six weeks. Participants to the working group suggest that introducing minimum standards for film contractors, rather than treating them as employees, is the likely outcome.

Thom is unimpressed with this style of policy formation: "What you've described, in any other context, sounds like extortion."

One man's extortion is another's existential battle for survival.

David Wilks, the enthusiastic general manager of Weta Workshop, is keen to emphasise how only one-fifth of his divisions' business is directly tied to subsidised film work - but he still sees darkness if current settings unwind.

Weta Workshop general manager David Wilks stands next to one of the many props produced at the Miramar-based operation. Photo / Mike Scott
Weta Workshop general manager David Wilks stands next to one of the many props produced at the Miramar-based operation. Photo / Mike Scott

Citing the buzz from being associated with big-budget film work as a vital intangible for even the non-film parts of the business, he says: "We would still bleed to death, just more slowly."

Jackson approaches the issue directly, noting similar schemes in rival territories make the debate binary : "You seem to be asking whether New Zealand needs incentives. In my mind it's very simple: Does New Zealand want to have a film industry?"

According to Robertson, the answer from government is still in the affirmative: But there's limited appetite for raising the stakes further. Australia's recent boosts to their subsidy regime aren't likely to be matched: "That's certainly not on my radar screen at the moment."

Some arms of government - notably the Ministry for Business, Innovation and Employment - have been consistent boosters, but Treasury has long sounded a note of caution that the current scheme is at best break-even for government coffers and at worst has been a fiscal drag.

This cost was said in the evaluation to be outweighed, particularly for subsiding international productions which were claimed to deliver $2.39 in net economic benefits to the country for every dollar spent by government. These claims however, were sharply criticised in peer review which, using the same data, said the real figure per government dollar spent could well be 70 cents - a net drain to the economy.

With competing narratives and special effects, the actual costs - or benefits - of the subsidy scheme are not easily rendered.

In financial circles, "Hollywood accounting" has long been a euphemism for opacity. Even Jackson himself has taken issue with it, suing studio New Line in US courts in 2005 alleging accounting treatments suppressed the Lord of the Rings profitability, costing him around $125m as he was entitled to a share of earnings. The lawsuit was later settled.

For The Hobbit, hints of similar special effects can be seen. According to financial statements filed with the Companies Office for 3 Foot 7, the local company set up to make the trilogy, the five-year billion-dollar production resulted in only minimal local profits and only $234,000 in New Zealand income tax paid.

Profits from the three films - likely in the billions given the trilogy raked in $4.3b at the box office - were instead booked elsewhere.

Studio bosses at Time-Warner used a company called Virtucon to finance the trilogy, advancing $1.07b to 3 Foot 7 to meet production costs. As far as shell company names go, the choice here is a self-referential in-joke.

Time-Warner also produced the Austin Powers series of spoof spy films, where Virtucon was the globe-spanning mega corporation owned by comical villain Dr Evil.