MONTREAL: The country’s two main producer associations, the CFTPA and APFTQ, and CAFDE, the primary distributor association, are urging Telefilm Canada to make important modifications to its proposed EIP recoupment policy.

The industry says Telefilm’s proposal to limit distribution advances to 5% of the budget in the first recoupment position, called tier 1, effectively discourages investment in high-content Canadian productions and will prompt distributors to discount their advances to compensate for their newly downgraded recoupment status.

The CFTPA says distribs should be allowed to recoup 100% of their advances or minimum guarantees up to 20% of the production budget in the first position. The APFTQ says the distributor advance should be repaid in full, in the first instance, with no limit on the amount.

Another seriously contested issue is Telefilm’s plan to split recoupment territories into two streams: the world except the U.S.A. and the U.S.A., with the U.S. territory reserved as a special revenue-corridor for Telefilm and certain other investors. The plan provides no recoupment provisions for distributors in the U.S. territory and relegates both the producer’s federal and provincial tax credits to final tier status, recouping only when TFC is fully repaid, which arguably, in some instances, may be never.

‘Furthermore, we don’t understand the proposal to separate the U.S. market, thereby requiring distributors to negotiate two agreements with producers,’ says CAFDE president Richard Paradis in a July 23 letter to Telefilm executive director Richard Stursberg.

TFC says an end-user presale to the U.S. may be included in a production’s financing structure (and not as distribution revenues), however, Telefilm says it will reserve the right to review its position in other territories ‘to ensure the EIP’s expectation of revenue is no less favorable’ than the reserved U.S. corridor position.

‘Actually there are two major issues for us,’ says Claire Samson, president and CEO of the APFTQ. ‘We want the producer to remain on the first level of recoupment for the [provincial] tax credit invested in the production, and we wish that Telefilm would not limit the minimum guarantee advanced by the distributor by limiting [the distributor’s] recoupment, or the ability of the producer to raise advances.’

In a July 25 letter to Stursberg, acting CFTPA president and CEO Guy Mayson says, ‘Telefilm now recognizes that producer deferrals are the single greatest obstacle to meeting the working capital requirements of a production company. A number of 2003 projects with Telefilm investment modelled their current deals against the Telefilm proposal – in all cases both producer and distributor positions worsened.’

In Telefilm’s proposal for English-language productions, the distributor advance is limited to 5% of the budget in tier 1. In tier 2, the balance of the advance is repaid along with Telefilm’s copyright (equity) interest and the copyright of other investors, ‘but no more favorable than pro rata and pari passu with Telefilm.’ All the other investors and advances are paid off in tier 3 except the producer’s provincial and federal tax credits, which are secured in the final tier 4 position.

CFTPA says its proposal to cap distributor advances at 20% of the budget is based on a five-year trailing average for English-track productions. It says producer investment (including deferrals) made up 10% of a production financing plan, while the distributor M.G. on average contributed 9% to the same financing plan.

Equal tier 2 recoupment

Both APFTQ and CFTPA want tier 2 revenues to be recouped equally between producers (100% including both the provincial and federal tax credit) and the other investors, including TFC.

Both producer associations argue that the provincial production tax credit program was historically established to help producers capitalize their companies. The lack of capitalization of production companies is also raised by Telefilm in its Corporate Plan for 2003-2004 to 2005-2006.

The Quebec producers have asked TFC to maintain the status quo in recoupment, adds Nathalie Leduc, APFTQ director, financing sector.

‘It’s rare that the [distributor] advances exceed 5%. But who says in the future there won’t be a [French-language] series where someone will be willing to advance 10%,’ says Leduc.

For French-track productions, the APFTQ says the distributor advance should be repaid in full, with no limit on the advance. In the second position, the producers say that revenues should be split equally between the producer’s provincial tax credit (maximum 14.6% of the production budget), until fully paid, and the other equity investors, including Telefilm and the balance of producer equity, the producer’s federal tax credit, as well as specified parties owed deferrals. The third position is split between all the investors up to 100% recoupment by Telefilm and includes the producer’s federal tax credit.

Leduc says Telefilm’s modelling exercise (46 projects, including 18 of the highest-returning projects – i.e the most successfully exported, and projects selected at random) completely excluded French-language productions.

CAFDE also recommends removing the 5% cap on the distributor’s advance in tier 1. ‘We fail to understand why a distributor should be limited in recouping his advance, particularly when there is no financial assistance from Telefilm for distribution advances,’ says Paradis.

CADFE also wants distributor commissions and fees to be capped at 35% of foreign sales, not the 30% proposed in Telefilm’s recoupment plan.

Paradis says these days it’s standard practice for international third-party sales agents (sub-distributors) to require 25% commissions, and the Canadian exporter, responsible for dubbing and subtitles for foreign sales and reformatting, should be allowed 10% commissions.

Expense cap over territories

CAFDE also wants the proposed 10% sales expense cap to be calculated across the board, or over all territories, not per each territory, adds Paradis.

Paradis says a 10% fee from the collection of re-transmission royalties paid to Telefilm should be paid to distributors, as a form of incentive, as opposed to the TFC proposal that ‘royalties must be paid directly to Telefilm without deduction.’ Distributors will be much more aggressive in recoupment, says Paradis. ‘In other words, why would we [distribs] go after some huge foreign country just to give all the the money to Telefilm?’

In response to certain industry claims about the impact the new CTF/EIP policy will have on international distribution advances and presale money, Telefilm reports that overall foreign financing participation in Canadian drama and children’s programming with EIP support in the past two years made up only 2.95% of budgets.

‘The breakdown by financial participants is as follows: co-productions 1.72%; pre-sales 0.64%; distribution advances 0.39% and other 0.2%. In the same two-year period, Telefilm (EIP) and LFP funds accounted for 39% of production costs. International financing has shrunk by approximately 50% from previous years,’ states TFC’s policy document.

Telefilm reports total (all categories) recoupment for 2002-03 was $25.9 million.

It’s believed most of what TFC gets back in recoupment is from the distribution sector, and that mostly from the feature film sector.

-www.telefilm.gc.ca