A study undertaken at the University of Stellenbosch Business School investigated how South African film producers are financing their projects. It also explored ways to engage the private sector. The researcher hoped that this knowledge will contribute to research on the South African film industry as reliable information is required to build investor confidence.
Why this study?
The potential of cultural industries to contribute to a nation's economy has been recognised by most knowledge-based economies. The South African film industry is an example of a cultural industry that can generate growth, reduce unemployment, increase tax revenue and promote SMMEs. It can also indirectly contribute to hospitality, tourism, catering, transport and retail. However, the film industry is hampered by limited access to funding.
This study examined how successful South African producers financed their films, and it aimed to provide insight into the experiences of producers who have sourced finance for numerous films, with the intention to also assist fledgling producers. This information can contribute to the increased production of local content and growth in the local film industry.
What did the research find?
The literature review showed that financing a film is a complex balancing act. The quantitative study which included eleven out of the sixteen production companies who have
produced more than one film in the period 2005 to 2012, examined how successful South African producers financed their films and mitigated risk for investors. These are the sources of finance they used:
- Government funding: The research showed that government was the most utilised source of finance. The Department of Trade and Industry rebate is an integral component of a South African film's budget. However, it was felt that the DTI rebate threshold should be lowered to R1 million as films produced at this level have shown to generate a respectable investment return at the local box office.
- Industrial Development Corporation: The IDC provides what it terms a gap loan, but it is likened more to senior debt. The producers in the study however find the IDC a cumbersome and costly source of finance. Concern was also expressed that the IDC is ill equipped to evaluate the quality of a film project and crew.
- Private individuals: Investment from private individuals, mostly family and friends, was the second most popular source of finance. This is also the cheapest source of finance, as these individuals are willing to relax financial expectations, accept risks and look beyond commercial reasons for investing in a film.
- Outside equity: Investment from high net worth individuals is considered difficult to attain, but a track record of success can help. Unfortunately, few local producers have been able to provide investors a risk-adjusted investment return. Appropriate tax benefits would also assist in encouraging investment from them.
- Private sector: Investment from the private sector is yet to gain major traction. A positive performance track record would assist. A major hindrance is that in most cases production houses approach investors with a single film, which is high-risk. Developing a slate of films will reduce risk and add scale to an investment, making it more appropriate to larger private sector investors.
- Debt and other sources: Debt is primarily used by first-time filmmakers who struggle to source outside funding. Other popular sources of finance include television presales and product placement.
In the South African film industry, return on investment is hampered by distribution issues (short distribution windows, low marketing spend), and the size of the market. As a result, for most local films, international distribution is crucial for generating a return on investment.
Participants stated that having a recognisable face would greatly assist in this endeavor. Securing international actors on South African budgets can be difficult, therefore it was also suggested that the DTI should reconsider what qualifies for its rebate.
To conclude, investing in the development of quality scripts and educating stakeholders on how to exploit the value chain will aid the progress of the industry and open up access to funding.
THIS RESEARCH WAS CONDUCTED BY:
KELLY STAAK and PROF MESHACH AZIAKPONO
This is a summary of a study conducted by Kelly Staak for her MPhil in Development Finance research project at USB, supervised by Prof Meshach Aziakpono, Professor in Development Finance. The research assignment titled Financing the South African film industry and mitigating investors' risk is available at http://scholar.sun.ac.za.
This article forms part of the Leaders' Lab-online research articles which make new management/leadership knowledge accessible by providing summaries of PhD dissertations, MBA and MPhil research assignments, academic articles, and other USB research.
Leaders' Lab hyperlink to: http://thoughtprint.usb.ac.za/Pages/USB-Leaders-Lab.aspx