Submission for Consultation regarding the Update on the Film Development Fund

Hon Andrew LEUNG Kwan-yuen
Chairman
Panel on Information Technology and Broadcasting
Legislative Council
Hong Kong Special Administrative Region
c/o Legislative Council Secretariat

Submission to the Legislative Council
Information Technology and Broadcasting Panel
Regarding the Update on the Film Development Fund
Friday April 2nd, 2009          LC Paper No. CB(1)1224/08-09(02)
(English version only)

The Lion Rock Institute (LRI) appreciates the opportunity to comment on the Film Development Fund
(FDF). The LRI openly acknowledges the possibility that some films under the FDF may be successful
films at the box office or enjoyable to watch, but we remain strong to our convictions that the
government has no place involving itself within the industry.

Please review LC Paper No. CB(1)1365/06-07(02), Submission to the Legislative Council Information
Technology and Broadcasting Panel Regarding Intervention in the Movie Industry from Tuesday April
17th, 2007 where the following is outlined:

-The Demand for Subsidy Never Ends
-Damage to Our Creative Class
-No Accountability, Bad Investments
-Spin-Off Benefits vs. Crowding Out
-Regulatory Capture – Not a Theory, Our Current Situation

The Lion Rock Institute respectfully invites the Legislative Council and the Panel on Information
Technology and Broadcasting to trust the Hong Kong people to reward those who best apply scarce
resource of creative talent. This current program creates many negative consequences as outlined
above and recorded in LC Paper No. CB(1)1365/06-07(02).

The government should support our best creative minds with their own hard earned dollars, be they
online, at home or in the theatre.

Thank you for your consideration and continued work serving Hong Kong.

Annex

Mr. Albert Jinghan Cheng
Chairman
Panel on Information Technology and Broadcasting
Legislative Council
Hong Kong Special Administrative Region
c/o Legislative Council Secretariat
Tuesday, April 17, 2007

Submission to the Legislative Council
Information Technology and Broadcasting Panel
Regarding
Intervention in the Movie Industry
Tuesday April 17th, 2007  LC Paper No. CB(1)1365/06-07(02)
(English version only)

The Lion Rock Institute, recognizing the vital role that market signals play in indicating
productive uses of capital, is gravely concerned that the current government proposal to
subsidise the film industry.

This program will at best waste $300,000,000 of hard earned taxpayer money as the
government funds a B-movie industry destined to supply the pirate DVD market.

At worst, it will see industry players participate in a self-enrichment program, entice our youth
into an industry with no jobs and create a precedent for industrial intervention that will repeat
itself over and over, weakening Hong Kong’s competitiveness.

Furthermore, in this era of changing consumer taste, proliferation of alternative technology
and shortening attention span, this funding program will create unnatural incentive for creative
talent in Hong Kong to be train to work the increasingly obsolete sector that is movies of
traditional length.

If taxpayers choose to support the industry, they should do it by paying to see the movies in
the theatre or buying DVDs. If they believe that the industry is viable, they should invest in
new or pre-existing market players. Being coerced into this through taxation is immoral,
inefficient and ultimately harmful to the very creative talent this program was designed to help.

The Lion Rock Institute respectfully invites the Legislative Council and the Panel on
Information Technology and Broadcasting to trust the Hong Kong people to reward those who
best apply scarce resource of creative talent. Deny this request for funding and then support
our best creative minds with your own hard earned dollars, be they online, at home or in the
theatre.

The Demand for Subsidy Never Ends
The government proposal rests on the vague idea that the film industry has ‘spin-off’ benefits
that are never quantified. It is supported by a ‘monkey see, monkey do’ argument citing
France, Britain and Korea’s continued investment their industries.

However, if France, Britain and Korea were so successful, why does there continue to be a
need for continued subsidy of these global film powerhouses? Shouldn’t investors have
realized the vast wisdom of the governments in supporting this industry and stepped in to fill
the gap? Indeed, the Hong Kong government has been funding our film industry for years
through the Film Guarantee Fund and the Film Development Fund. Now the money is gone
and the industry and associated bureaucrats need another hit for their subsidy addiction.

Worse, encouraging people and companies to use taxpayer dollars to pursue an uncompetitive
business model, the government ensures a culture of dependency. Encouraging people to
receive subsidized training to work in a subsidized industry is laughable until the funding ends
and the tragedy strikes – years wasted training for a job not in demand.

Picking Losers, Not Winners In the New Media Era
Andrew Shuen Pak Man of The Lion Rock Institute specifically fears damage to our creative
class as they are enticed into producing products of diminishing attractiveness in the Internet
age. This could sacrifice their precious chance of being trained in producing video products in
formats that actually have consumer demand.

In other words, the continuing lack of market support will not only waste money, it will also
send our creative class down a blind alley while their international counterparts are forced to
innovate and become more skilled in adapting to new media and market tastes in the Internet
age.

The decline of movies is not unique to Hong Kong, and one-off hits from countries like
Korea should not be mistaken for a real industrial revival. Even the UK, cited in the
government submission to the Panel on this issue, has an industry in terminal decline,
government support notwithstanding1. British Treasury officials paint millions in tax revenue
as a benefit, even though that revenue is dwarfed by preferential tax breaks and industrial
subsidies – the type of logic used exclusively by politicians and bureaucrats justifying industry
handouts2.

1 Film industry ‘adds £3.1bn to UK’ . BBC News Online. 22 September 2005.: “figures for 2004 showed the
number of jobs in the UK’s movie industry fell by 20% to 24,816 people.”
Also: “… inward investment has fallen from about £549m in 2004 “to probably around £324m in 2005.” 2 Ibid.

In the United States, movie going has been in a decline for years. AMC theatres (North
America’s biggest chain) blames this on the unattractiveness of movie product3. The
proliferation of DVD sales, the cost of theatre going, cable and specialty TV and the
availability of alternative creative efforts online have all taken their toll4. Mr. Flanagan, in
his article concludes, “it appears unlikely that the movie business will return to growth
numbers anytime soon…” This is from the US industry where a single successful film can
have opening weekend box office receipts dwarfing the $300 million our government plans to
spend. What hope has our government of reversing an international trend responding to
profound technological and cultural changes taking place in the world today? Better to let our
nascent creative class, innovators and entrepreneurs discover opportunities, profits and create
great art th
rough the mechanism of the market.

Frankly, the track record of the Hong Kong government funding and selecting other types of
business (Cyberport?) have been somewhat disappointing. We do believe that even if we could
give the benefit of the doubt in this case, the moral argument of harming creative talent would
justify having this program stopped in this embryonic stage.

No Accountability, No Skill, Bad Investments
When government steps in to play the role of investor, they commit the classic mistake of
taking money from productive uses in the market to spend it on a bureaucracy that then puts it to ineffective uses.

The government proposal seems specifically designed to return to the old days when the
industry churned out countless terrible movies. The advent of piracy forced players to make
movies that were best seen on the big screen, keeping people in theatres. Targeting low
budget films put the government squarely in the role of B-movie funder. Making movies no
one will pay to see seems a shameful way to use taxpayers’ money.

The argument against government intervention in specific industries is so well established it
does not bear repeating. From Mao’s Great Leap Forward to Hong Kong’s own Cyberport
and Science Park, government intervention simply doesn’t pay.

The fact is, if government bureaucrats were expert investors, they would earn far more
money working with Goldman Sachs, Carlyle or Golden Harvest.
3 AMC Entertainment 10-K filing, Q3 2005: “U.S. and Canada admissions revenues and industry wide-box officewas impacted by overall popularity of film product.” 4 Flanagan, Terence. Does Box Office Decline Have Legs? LeverageWorld, January 27, 2006.

Spin Off Benefits? Who Knows?
If their argument is spin-off benefits, then they hold their wisdom higher than that of the Hong
Kong people, the classic hubris of socialism that inevitably leads to disaster – or at least a
huge waste of government funds. Worse, they act on this supposed superior wisdom with no
risk to themselves using other people’s money and no need to show the results.

One of the positive things about the Hong Kong government is that they do recognize that the private sector often has expertise that surpasses their own. Accordingly, they propose to
include industry players in helping with the decision making process.

Regulatory Capture – Not a Theory, Our Current Situation
Unfortunately, this leads to the danger of regulatory capture, a process explained by Nobel
Laureate James Buchanan in his work on public choice theory. Simply put, those with the
most at stake will strive, often successfully, to control the regulatory and other government
processes that influence them or could benefit them.

The current proposal may seem to safeguard against this, by limiting the size of the
disbursements, leaving the government in the role of producing B movies. However, David
Webb, in his paper Lights, Camera…Budget5, outlines concerns about how this process has
been perverted in Hong Kong’s previous film subsidy regimes to benefit limited groups of
people. The complexity of laws often provides more, not less opportunity for rent seeking
behaviour, as those in rule-writing and decision making positions consider every combination
to work laws and policies to their favour.
5 http://webb-site.com/articles/filmbudget.htm

Stop Before We Subsidise Again
The industry will survive. Many believe that Hong Kong movies now are vastly superior to
the dross produced in the 1990’s. Individuals have sold the government on the idea that they
deserve the material support coerced from their fellow Hong Kongers – that somehow their
livelihood is superior to their fellow taxpayers. Calls from other sectors for government pork
have already begun. And why shouldn’t they? Why do the 6,000 receive $50,000 a head and
not others?

For every industry subsidized, 10 more are emboldened to ask for their share of public
largesse. We need to stop current subsidy programs, not create new ones.

Hong Kong has successfully built an economy largely free of the complexities that complicate
and bedevil other regions. We clearly dominate Singapore in attracting corporate headquarters
through a policy of wide spread economic freedoms – not tax breaks for selected firms. New
industries rise and old ones leave as capital is allocated to the most productive uses. This is
admirable and makes Hong Kong a leader in the region and the world.

Economic freedom, not government subsidy, has made Hong Kong great. Trust the people of
Hong Kong to decide whether or not to reward the film industry for excellence, and please do
not sacrifice the future talent of the creative industry by enticing them into this trap.

Thank you for your consideration and continued work serving Hong Kong.

By and On Behalf of:
Andrew Shuen  Peter Wong  Andrew Work