The European Commission’s latest draft Cinema Communication on state aid for films and other audiovisual works has failed to dispel major concerns expressed by various sections of the European film industry, particularly about proposed territorialisation guidelines.

Over 80 public authorities, film trade organisations and private individuals submitted responses to the third public consultation by the June 28 deadline.

Several of the submissions welcomed changes in the new draft over the last official version from 2012, such as the decision to remove a regressive scale of aid intensity for high-budget foreign productions or the proposal that films supported by state aid are deposited with a film heritage institution.

Exhibitors’ trade bodies such as CICAE, UNIC and Germany’s HDF and AG Kino were naturally pleased about the proposal that the Communication’s scope of aided activities be extended to include cinemas.

At the same time, UNIC’s chief executive Jan Runge stressed that his organisation felt it was “important to highlight that the distinctions between arthouse cinemas and other cinemas are increasingly blurred. Funding agencies should be able to notify aids for any type of cinema.”

However, many of submissions concentrated on the draft’s new regulations proposed for territorial spending obligations.

CineRegio, the network  of 39 European regional film funds, wrote: “There has been a significant and worrying shift from the previous drafts and dialogue of the last 18 months, particularly on the question of territorialisation.”

Under the original Communication of 2001, an EU Member State could insist that up to 80% of the whole budget of a film  could be required to be spent on goods and services obtained from suppliers within the Member States.

But the new draft proposes that a maximum territorial spending obligation of 160% of the aid would correspond to the previous ‘80% of the production budget’ rule when the aid intensity reaches the general maximum of 50% of the budget.

Furthermore, the draft argues that the obligation for producers to use local subcontractors and suppliers of goods and services as cost seligible for aid would constitute “a discrimination of services by non-resident firms.”

While the British Film Institute (BFI) observed that the UK’s national and regional funding mechanisms would remain valid under the new Communication because they do not restrict the origin of goods, services or workers,  it was recognised that the new regulations “will undermine several of the important state support mechanisms across Europe – notably from France and Germany – and this could have an adverse effect on the audiovisual sector in the UK as well as across Europe.”

In its submission, the Irish Film Board (IFB) gave an illustration of what the regulation would mean to its own operations if the new rules came into force: “If Section 481 and the Irish Film Regulations (2008) did not require that goods and services be obtained from suppliers in Ireland, in order to qualify as eligible expenditure, many goods and services would be obtained from outside of Ireland particularly from the well served United Kingdom, including Northern Ireland.”

“The potential result would be that the creative and economic infrastructure for film production in Ireland would be hollowed out and Ireland would at best become a location for inward production with limited benefits to the local creative economy,” the Galway-based funder argued. “If this were to happen, the justification both culturally and economically for a tax incentive for film production (at least in the eyes of the Irish government) would diminish to a point where the incentive could be withdrawn.”

“The consequence, particularly if tax credits continued to be available in the United Kingdom including Northern Ireland. would be that production activity in Ireland would diminish substantially and even some level of indigenous film production would locate its production in the United Kingdom including Northern Ireland to avail of the tax incentive there,” the IFB concluded

The French trade organisation FICAM added that “this complete de facto ban on territorial obligations will result in windfall and subsidy shopping between Member States aid programs, a fragmentation of the European film industry, a loss of quality in terms of know-how and infrastructure, and a reduced activity level, even though this is contrary to the assumed targets of these policies. This will lead in turn to reducing public policies that support film due to the weaker economic and cultural impact and potential returns for their initiators. Ultimately, this project will affect growth, employment and cultural diversity.”

Meanwhile Italy’s ANICA observed: “While it is true that, in the case of aid awarded as grants, the maximum territorial spending obligation of 160% of the aid amount corresponds to the previous ‘80% of the production budget’ rule when the aid intensity reaches the general maximum (50% of the production budget), the same does not hold for all the cases where the aid intensity is lower than 50%. In all these cases, which account for the majority of the co-financing schemes, setting the ceiling at 160% of the aid would reduce the granting authority’s incentive to co-finance projects, as there are lower economic returns on the investment.”

“The Commission hasn’t presented conclusive evidence that the current approach has affected, affects and will affect competition and trading conditions to an extent contrary to the current approach,” suggested Hrvoye Hribar of the Croatian Audiovisual Center. “It is also worth noting that, to the best of our knowledge, the Commission has never received a complaint concerning the territorial spending obligations although they have been in existence and implemented for 11 years.”

Consequently, many respondents have proposed that the 2001 territorialisation regulations should be retained in a future, revised draft.

Moreover, given the often vague, unclear or contradictory statements in the Commission’s draft, it has been suggested that more time should be taken in Brussels on hammering out a paper which would not lead to multiple interpretations.

The BFI added that it had been “disappointed” by the “extremely limited consultation period”: “More analysis is required to truly test the impact of some of the changes and respondents should have been given more time to carry this out.”

“We regret that after nearly two years of work on this dossier, we have yet to have sight of an impact assessment from the Commission which models the  effect of its proposals on the number, range and value of European production and associated employment, and Europe’s cultural diversity,” the BFI concluded.