Film financing is an aspect of film production and it concerns determining the potential value of a proposed film. The main factors determining the commercial success of a film include public taste, artistic merit, competition from other films released at the same time, quality of the script, quality of the cast, the quality of the director and other parties etc. Even if a film looks like it will be a hit commercially, there is still no accurate method of determining the levels of revenue the film will generate. In the past the risk mitigation was aided by pre-sale advantages, box office projections and negative rights.
Apart from the strong ancillary markets for DVD, CATV and other electronic media (like streaming video on demand-SVOD), investors were convinced that the subsidies in the form of tax incentives, credit and pre-sale discountable contract finance from foreign distributors could help mitigate the potential losses. As production costs have risen, however, potential financiers have now become increasingly insistent upon higher degrees of certainty as to whether they will actually have their investment repaid and assurances regarding what return they will reap.
Film production constitutes the most important part of the film industry. Film production involves development of a story, its screenplay, dialogue etc., music recording, film shooting, lab processing and post-production activities such as editing, dubbing, re-recording, mixing, taking final prints, obtaining censorship clearance and release of prints for distribution. Under the existing financing practices followed in the industry, the producers normally bring in about 25 per cent of the cost of production of a film and the remaining 75 per cent is met with advance payments from distributors and financing from private financiers. An interesting aspect of film production is that the producer recovers the entire cost of production before or at the time of its release through sale of distribution rights to the distributors (normally distributors pay up to 40 per cent of the agreed amount, when the film is under production, and the balance at the time of the its release).
MIDDLE CLASS DESERTS CINEMA HALLS: Out of the approximately 1,500 cinema halls that were in existence at the time of the Liberation War, only 500-600 now remain. The 70-80 halls that are slightly better are only marginally so-with chairs instead of benches and concrete walls and ceilings. Out of them, 20-30 are of the minimum middle class standard and again there are only a handful of them having high quality projection facilities and air conditioning. In a sharp contrast to the global trend of 'multiplexes'-here are only modern halls equipped with two or more screens catering to middle class audiences. Dhaka to-date has only one multiplex theatre. The areas like Gulshan, Banani, Uttara and Dhanmondi have no cinema halls at all. It's no wonder that the middle class, once the backbone of the audience, has long deserted the theatres.
LUCRATIVE INVESTMENT OPPORTUNITY: Thanks to persuasion by a number of stakeholders, the film sector was declared an industry by the government in 2001, thus entitling film-related enterprises and establishments to special tax benefits. In such a situation the film industry offers a lucrative investment opportunity for banks and corporate entities.
India's business group Tata entered into film business in 2002 in the name of Tata Infomedia through the launch of the Aitbaar Movie. After that they gifted to the Indian film industry a good number of big-budget movies. Besides, Reliance ADA Group acquired the Adlabs Films Limited in 2005, one of the largest entertainment companies in India, which has interests in film processing, production, exhibition and digital cinema. Reliance helped make a mentionable number of movies in Hindi, Bangla, Telugu, Malay, Kannada, Tamil. Like India, Bangladeshi conglomerates such as Abul Khair Group, Meghna Group, City Group etc. may think about making investments in the entertainment sector. Investments may be made in the forms of backward linkage (technology and finance) and forward linkage (display and distribution).
The probable eligibility for financing may be as follows: 1. Banks may provide finance to film producers (corporate as well as non-corporate entities) with good track records in this field. 2. Banks may also provide finance to these entities for production of films in participation with the Bangladesh Film Development Corporation (BFDC).
CRITERIA FOR FINANCING: The Bangladesh Bank may frame a guideline on film financing. It may be as follows:
1. Banks may obtain from the producers a detailed budget for each film, clearly indicating the entire cost estimate for the film and the means of financing the same.
2. Ordinarily producers are required to bring in at least 25 per cent of the project cost as promoters' contribution. Producers are also required to tie up with distributors in the usual course as per usual practice (sales advances) to cover 35 per cent to 40 per cent of the budget.
3. Thus, bank advances could be made for meeting the remaining requirement of 35 per cent to 40 per cent of the project cost. However, in some cases where the banks are quite comfortable with the project as well as the background of the producers, the financing could be increased up to 50 per cent of the project cost.
4. Banks may provide finance to such projects, the total cost of which does not exceed Tk 100 million. The amount sanctioned should be within the overall ceiling of their exposure to the film industry as prescribed by the Bangladesh Bank. Banks may also internally prescribe a suitable limit for their overall exposure to the film industry.
5. The disbursement of a bank loan should ordinarily start only after utilising the promoter's contribution and advance payments from the distributors. There may not, however, be any objection to bank loans being disbursed side by side with payments by distributors on a proportionate basis.
6. The arrangement should be made at the commencement of the project. However, in any case, banks may disburse loans only after the promoter has brought in his contribution to the project.
The sources of funding for the purpose are given below:
1. Private financing: It is the most frequently-used source of funding. Stakeholders and their peers may finance a film.
2. Promoter's equity: The second most popular source of funding is the promoter's equity. Usually film producers and production houses are the source of this funding.
3. Institutional debt: Financial institutions, non-banking financial institutions, insurance companies and different other funds may used for film making.
4. Distribution financing: It may available for big banner films with reputed producers, directors and star cast.
5. IPO (initial public offering): In India a good number of film making firms are listed players in the capital market. This option can be explored here.
6. Venture capital/private equity (company level): For production and distribution of non-traditional films, short films and art films venture capital firms may come forward and invest their money.
Most importantly, the period of loans may be fixed based on the concerned bank's assessment of the cash generation prospect of the project. On the other hand, banks or non-bank financial institutions (NBFIs) may launch innovative financing products for film production alongside traditional products like project finance, term loan, demand loan, cash credit, overdraft, factoring, lease financing, bank guarantee etc.
The security arrangement can be made as follows:
1. Banks may obtain the Laboratory Letter conveying rights to the negatives of a film in favour of the lenders.
2. The music audio/video rights, CD/DVD/Internet rights, satellite rights, channel rights, export/international rights etc. should also be assigned to the banks to serve as the main security provider.
3. First hypothecation charge on all the tangible movable assets under the project should be made.
4. Arrangement of all agreements and intellectual property rights (IPRs) in favour of the lenders should be made. Lenders will have the right to negotiate on valuation of all IPRs.
5. Collaterals, if necessary, may be obtained at the discretion of banks.
6. A trust and retention account (TRA) may be maintained for all capital as well as revenue inflows and outflows. Thus, receivables on sale of all IPRs may be credited to the TRA. The modalities of TRA may be worked out on a case-to-case basis to the satisfaction of the lenders. A no-objection certificate (NOC) from all concerned parties for the TRA arrangement will be required. The lenders will have the first charge on the TRA.
7. Banks may look into the legal aspects of the laboratory letter, assignment of music, audio/video rights, etc.
When it comes to insurance, the existing products acceptable to banks may be offered to the film producers.
Follow-up or monitoring is also not less important. Banks should devise appropriate accounting and information/data submission formats for periodic flows of information from the producers. They should also obtain periodic progress reports, cash flow statements, audit reports and such other reports as are considered necessary. Banks may also consider appointing specialised agencies for monitoring the timely shooting/processing of the film and assessing the reasonableness of the expenditure.
RISK FACTORS: Production completion is one of the major risks in film making. To mitigate this risk, it would be necessary for banks to carefully appraise the projects having due regard to the track record of the producers as well as the distributors. If necessary, banks may also engage industry specialists or consultants for evaluation of proposals. Insurance of risks and key personnel etc. needs to be organised. Pending development of appropriate risk insurance products, the existing products such as equipment insurance, key personnel insurance, etc. could be availed of.
FINANCE THROUGH BFDC: 1. The Bangladesh Film Development Corporation (BFDC) is a specialised agency set up by the government of Bangladesh for promoting quality cinema. The BFDC produces, co-produces and finances films, particularly small budget films. Over the years, it has provided a wide range of services essential for the integrated growth of the Bangla cinema industry. Considering that appraisal of film projects requires special skills (which all banks may not be equipped with, at least in the initial years), banks, at the request of the BFDC, may also consider extending credit for production of films in participation with the BFDC. This would be an additional channel for extending credit to the film industry. The detailed modalities in this regard (including security cover) may be worked out mutually by banks and the BFDC.
2. Banks may also consider providing reasonable credit facilities to the BFDC taking into account usual safeguards observed while taking credit.
Film is the only art form that requires massive infrastructure and an industry supporting it. In Bangladesh, however, film is neither an art nor an industry. The number of cineplexes and their quality are very poor compared to the demand. To meet the demand-supply gap in the entertainment industry, banks, financial institutions (FIs) and large corporate houses may come forward to make quality film and get involved in the distribution business. At present a great social problem in our country is to pass the leisure time or holiday with family members. Most of the people spend their time taking fast food and visiting shopping malls. To mitigate this problem, film financing may be a good option.
The writer is Associate Relationship Manager, Corporate Banking Division, BRAC Bank Ltd. mayeen.ratan@gmail.com
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