Hard cash may have heavyweight appeal and a sense of immediacy, but it is in increasingly short supply. Patrick Frater examines how soft money has become the currency of choice for the world's independent producers.

Over the next weeks, and leading up to the Screen International European Film Finance Summit being held in Berlin on 5 February, 2003, Screen International writers look at where it is to be found, how it is being used and who is benefiting from it.

Screen International's international round-up of the hard facts about soft cash begins with The United Kingdom. Click on the link for the article.

This is followed by Ireland, Germany, Canada, France, The Netherlands, Luxembourg, the Nordic Region, Australia, and the newcomers - Italy, Belguim, Romania, China & the US

Soft or not, money talks. While the Los Angeles industry worries about the tax breaks and other incentives offered by its northern neighbour Canada to 'runaway productions', Canada in turn is worried by the lure of other destinations as far afield as Australia and Romania.

"For the first time ever, production in Prague has surpassed production in Montreal," says financier Martin Katz, president of Canadian-based Grosvenor Park. In a global industry, territories as diverse as China, South Africa and the Isle of Man are achieving results by giving film producers more of what they want, notably the means to produce.

Over the last four years, the independent film production sector has suffered a series of collapses that have successively removed most of the planks on which their businesses were built. One after the other, the insurance-backed funding business, gap financing, the pre-sales market and Europe's free- and pay-TV sectors have shrunk or disappeared. Add to that the overnight collapse of the wildly over-optimistic Neuer Markt, which briefly led many German enterprises and investors to take leave of their senses, and the increasingly risk-averse mood of US buyers, and the staple sources of funding for independent films have all disappeared since 2000.

The new millennium has seen a string of well-respected small- and medium-sized production outfits go bust. Weighty reports from France, Italy and the UK have bemoaned the tiny foundations of equity capital on which most European independent film businesses stand.

But while independent producers can be forgiven for thinking that they have never had it so bad, rarely have they ever been offered such a wide range of alternative financing mechanisms.

The first issue is knowing where to look. Producers around the world are tuning in to 'soft money', a concept whose definition ranges from simple handouts, through tax breaks which act like interest-free loans from the fiscal authorities, to more complicated schemes that give post-hoc rewards to box-office performance, but which in the hands of a clever lawyer can be harnessed to provide production cash upfront.

"We are moving into a period where access to subsidy dollars is going to be crucial to getting a project off the ground," explains Canadian producer Steve Hoban.

Better still is a mixture of several sources of subsidy or alternative funding. Myriad Pictures chief executive Kirk d'Amico describes the production process today as "cobbling together funding from anywhere you can".

At the AFM earlier this year, MDP Worldwide chief Mark Damon told a seminar audience, "you can maybe finance 45%-50% with pre-sales, but these days it is all about soft money". Today those figures look bullish, even for an English-language production. A foreign-language picture without star names may be lucky to get more than a pre-sale to its local TV network.

"There is an enormous amount of soft money about," says UK producer Damon Bryant, who recently set up Sonnet Pictures with director John Maybury and is working on the $23m Marlowe. "It is not difficult to find 50%-60% of your financing and then, if you have a good cast, finding 40% overseas should be possible."

Countries around the world have realised the economic benefits of attracting film and TV productions to shoot in their territories. These range from the simple spending multiplier effect that almost any inward investment can bring, to the difficult-to-quantify spin-off benefits in terms of tourism and image. Smaller territories may not have much hard cash to invest in film-making, but they are increasingly willing to tailor soft packages that attract prestigious foreign films. And they can make a convincing economic case.

Providing soft money for local or incoming foreign pictures may require local authorities to give up short-term tax revenues, but the rewards can be longer term through infrastructure building and training. In Sweden, where film-making was previously seen as bringing mainly cultural benefits, the local industry is now seeking to have its central government subsidy sourced not from the arts ministry, but the finance ministry instead.

As the economic case for territories to offer soft money becomes ever firmer, there is a growing phenomenon of 'tax competition'. For all that California's state government and local unions may decry runaway productions, to a cash-strapped producer they make perfect sense. So much so that California and a number of other states have been looking to bring in their own tax incentives. Soft money competition and the ever-fluctuating flows of public and private money are changing the geography of film-making.

"Luxembourg has become increasingly attractive in the past two years," says UK producer Alistair MacLean Clark, who recently set up genre thriller Octane as a UK-Luxembourg co-production. "It is not that Luxembourg has done anything to make itself more popular - the last major change in legislation was in 1998-1999 - but as the pre-sales market has died the tax opportunities have taken on greater relevance."

Guy Daleiden, who heads the Luxembourg fund that Octane used, says there are benefits from abandoning an inward or protectionist stance. "As our system has become more popular with foreign producers we have been able to become more picky about choosing the ones that do most for our infrastructure," he says.

It seems to be working. Daleiden reports that Luxembourg technical crews are now being chosen on merit and are being offered work across Europe. "This year we had five films made by Luxembourg directors. That is unheard of."

Significantly, Australia's new 'tax offset' system is also blind to national origin and offers tax credits to any mid-sized film that spends 70% of its budget on Australian soil.

While UK producers are horrified by the equity investment that may disappear following the recent closure of Granada Film and FilmFour, soft money may come to the rescue - by bringing the UK closer to its neighbours.

"The UK has more sale-and-leaseback finance as than can possibly be used by our productions alone. To take advantage of it, there is lots of co-production happening," says Chris Curling of producer Zephyr Films and tax financier Atlantic Productions. "Sale-and-leaseback has made us part of Europe far more effectively than membership of Eurimages ever did."

"The future is in co-productions," agrees Katz of Grosvenor Park, a company which has its roots in Toronto and London and is now opening offices in Paris and Dublin. He argues that with traditional sources of film financing drying up - from insurance-backed finance to European pay-TV - co-production has changed from a necessary evil to the sine qua non of independent production. "But whether that future is in Canada is another question," he adds.

Soft sell: different sorts of soft money

Tax credits: a system whereby a state offers a producer a rebate on film production costs spent in that country. The two most established systems of this type exist in Luxembourg and Canada. Both Australia and Iceland offer 'tax offsets' which also fit this category and appear to have taken their countries' attractions to a new level. Malta also uses it.

The system can be likened to going shopping abroad and claiming back the value-added tax (VAT) at the airport. The producer needs to be able to pay out the full cost of production before claiming a refund. This hurdle can be circumvented by use of specialist banks that are willing to discount the value of the future claim. Some countries are also much quicker than others in reimbursing tax already paid.

Tax allowances: the most widespread and potentially biggest source of soft money for film-making. It works by giving a tax incentive either to private individuals or to companies that invest in production companies or one-off film productions, sometimes through acquisition.

The German system famously works this way by creating film funds. The Netherlands' CV system of limited-liability partnerships also fits this mould, as do France's Soficas.

As no film at the project stage and few film companies have sufficient income to use the tax allowances, the trick is to turn the allowance into something with which producers can use to make their films. The UK's sale-and-leaseback scheme works by selling the entire copyright of the film to an outside investor who claims the tax rebate. The film is then leased back to the producer, allowing the investor to cover their acquisition costs and the producer to get the film distributed. Alternatively these can be looked at as tax deferral schemes or simply as interest-free loans from the tax authorities.

There will usually be some kind of criteria determining which films qualify for tax allowances. Germany, unusually, does not disqualify foreign productions, but the German tax advantages are only at their most efficient if all the 'losses' incurred at the production stage are attributed to the country. The fund also needs to be able to have some considerable influence on the production.

Loan support: These are loans made by government institutions on generous interest or repayment terms which would not normally be available on the open market. The UK and Italy operate this kind of 'soft loan' at a national level, while Germany's many Laender, or regions, provide loans. Alternatively, the same end may be achieved by government underwriting. In France, the state covers half the losses of some specialist film discounting agencies, while Italy and Spain have been the first recipients of guarantees from the EU-backed European Investment Bank.

Box-office rebates: a number of countries have systems which return a proportion of the box-office proceeds to producers. France has the most developed system, through its compete de soutien system, but Spain and some of the Nordic countries are also notable practitioners. (Some parts of the Media Plus programme use it to help distributors and exhibitors.) They have the advantage of transparency, being automatic rather than subjectively awarded, and do little to distort the distribution market because it is commercial success, not failure, that is rewarded.

Films need to qualify either through nationality or have nationality delivered through a co-production. Money from this kind of system is returned at the recoupment stage and is intended for reinvestment in future pictures. As it is not possible to be sure how much will be returned by the tax office until a film is released, this system can be tricky to use as a financing mechanism for a current project.

Subsidy: most European countries provide some form of cash injection to film productions on cultural or, more rarely, on economic grounds. They may be administered at national or local level, have some strings attached, such as a requirement to shoot in the territory, but reimbursement is not necessarily expected. On the other hand, with the exception of the Nordic region, they rarely amount to significant chunks of a film's production budget. The EU's Media Plus programme offers all sorts of non-production subsidy, notably for script development and training.

Cheap facilities/barter: facilities ranging from entire studios and locations to cheap scouting may all be arranged or provided by national or local organisations. Studios may take an equity or co-production position in a film without putting up any cash. Rather, they discount or provide their services for free. In other cases, such as Romania, South Africa or China, the costs of labour or studio hire is so much lower than those in Western Europe or the US that, although the producer cannot harness cash to put into a production budget, it amounts to soft money by any other name.

Co-productions: can be considered soft money as their purpose is generally to combine different national support systems for the benefit of a single project. They can be set up either under international treaties agreed by countries that encourage dual nationality film-making (Canada holds the record for having signed the most co-production treaties) or under the European Convention on Cinematographic Co-production. The Eurimages scheme rewards tripartite productions and bipartite financial co-productions.

Generally, producers have to be careful to structure a film to fit multiple sets of national regulations and may end up with a picture whose creative elements are driven by financial requirements - the dreaded Euro-pudding.