Report on the Media Development Fund and Public Investment in the Film Industry, 1995 to 2009

PP105/10

STANDING COMMITTEE ON PUBLIC ACCOUNTS

REPORT ON THE MEDIA DEVELOPMENT FUND AND PUBLIC INVESTMENT IN THE FILM INDUSTRY, 1995 TO 2009

REPORT OF THE STANDING COMMITTEE ON PUBLIC ACCOUNTS ON THE MEDIA DEVELOPMENT AND PUBLIC INVESTMENT IN THE FILM INDUSTRY,1995 TO 2009

Mrs C M Christian MLC (Chairman) Mr Q B Gill MHK (Rushen) (Vice Chairman) Mr D M Butt MLC Mr G D Cregeen MHK (Malew & Santon) Mr R W Henderson MHK (Douglas North) Mr J P Watterson MHK (Rushen)

The powers, privileges and immunities relating to the work of a committee of Tynwald are those conferred by sections 3 and 4 of the Tynwald Proceedings Act 1876, sections 1 to 4 of the Privileges of Tynwald (Publications) Act 1973 and sections 2 to 4 of the Tynwald Proceedings Act 1984.

Copies of this Report may be obtained from the Tynwald Library, Legislative Buildings, Finch Road, Douglas IM1 3PW (Tel 01624 685516, Fax 01624 685522) or may be consulted at

WWW.tymvald.org .im

All correspondence with regard to this Report should be addressed to the Clerk of Tynwald, Legislative Buildings, Bucks Road, Douglas IMI 3PW.

REMIT OF THE COMMITTEE

(1) There shall be a Standing Committee on Public Accounts.

(2) The Committee shall have -

(a) a Chairman elected by Tynwald, (b) a Vice-Chairman elected by Tynwald, (c) four other Members elected by Tynwald,

and a quorum of three Members.

Members of Tynwald shall not be eligible for membership of the Committee, if, for (3 ) the time being, they hold any of the following offices: President of Tynwald, Speaker of the House of Keys, member of the Council of Ministers, member of the Treasury Department referred to in section 1(2)(b) of the Government Departments Act 1987.

(4) The Committee shall -

(a) (i) consider any papers on public expenditure and estimates presented to Tynwald as may seem fit to the Committee;

(ii) examine the form of any papers on public expenditure and estimates presented to Tynwald as may seem fit to the Committee;

(iii) consider any financial matter relating to a Government Department or Statutory Body as may seem fit to the Committee;

(iv) consider such matters as the committee may think fit in order to scrutinise the efficiency and effectiveness of the implementation of Government policy; and

(v) lay an Annual Report before Tynwald at each December sitting and any other reports as the Committee may think fit.

(b) be authorised in terms of section 3 of the Tynwald Proceedings Act 1876 and the Standing Orders to take evidence and summon the attendance of witnesses and further to require the attendance of Ministers for the purpose of assisting the Committee in the consideration of its terms of reference. (5) The Chairman, Vice-Chairman and any member of the Committee shall not sit when the accounts of any body of which that person is a member are being considered.

TABLE OF CONTENTS

1. INTRODUCTION 1

2. THE EVOLUTION OF FILM FINANCING ARRANGEMENTS IN THE 4 ISLE OF MAN: KEY EVENTS AND DATES

3. SUPPORTING THE FILM INDUSTRY IN THE ISLE OF MAN: 6 DESCRIPTION OF THE FOUR FINANCIAL MODELS USED SINCE 1995

1995 to 1997: Tax credit schemes 6

1997 to 2003: Direct grants from DTI to producers 6

2003 to 2007: Isle of Man Film Limited 7

2007 onwards: CinemaNX Limited 9

4. KEY ISSUES OF CONCERN (1): GOVERNANCE ISSUES 14

Transparency and accountability 14

Performance management, targets and approvals 16

Potential conflict of interest 17

Investments by CinemaNX Limited 19

Resilience and succession planning 19

5. KEY ISSUES OF CONCERN (2): RETURN ON INVESTMENT 21

Local spend 21

Sustainability of the Media Development Fund (1): before 2007 24

Sustainability of the Media Development Fund (2): after 2007 25

Sustainability of the Media Development Fund (3): conclusion and 29 recommendation

6. POSTSCRIPT: FOLLOW-UP ON PAC'S 2006 RECOMMENDATIONS 32 (ISLAND FILM STUDIOS AND RELATED MATTERS) 7. CONSOLIDATED LIST OF RECOMMENDATIONS 37

Appendix 1: Letter dated 29th January 2009 from Chief Secretary's Office about 41 Island Studios and Associated Matters, with attachments

Appendix 2: Treasury response to this Report, dated 10th November 2010 55

Appendix 3: List of documents available in the Tynwald Library 65

1. INTRODUCTION

1.1 The film industry is one of the Isle of Man's most high profile marketing initiatives. Since 1995 the Island has built a worldwide reputation for co-financing and co-producing feature film and television dramas. 1 During that time over 90 feature films and TV dramas have been produced here. The advantages the Isle of Man can offer to potential producers include varied scenery and architecture readily accessible within a small area, good support and low costs. The potential advantages of the film industry to the Island include the generation of local spend within the Island's wider economy (for example, the hospitality sector), the creation of job opportunities for Island residents, and the development of film tourism. The industry has benefitted from public investment, rising from relatively modest beginnings in the mid-1990s to what is now a more significant level of investment and strategic use of the Media Development Fund.

1.2 We started looking at this issue in 2008 in the context of an investigation of the management and use of reserve funds in general. We reported on that wider investigation in March 2009 (PP39/09) but concluded that the fund associated with the film industry, the Media Development Fund, merited a separate investigation because of the complexity of the arrangements associated with it. It subsequently came to our attention that the Public Accounts Committee had looked at this issue in 2004 to 2005, although it had not produced a Report on it at that time.

1.3 The Committee did report to Tynwald on a related matter in 2006. Its Report on Island Film Studios and associated matters (PP135/ 06) made 14 recommendations related to the procedures to be adopted by the DTI in considering applications for grants. All the recommendations were approved by Tynwald on 17th October 2006. The present Report includes as a postscript an update on progress with those recommendations.

1.4 This investigation sits within the remit of the Public Accounts Committee as set out in the Standing Orders of Tynwald Court, and in particular within the Committee's duty

I This report was completed in July 2010. Following the procedure agreed by Tynwald in July 2006, it was then submitted to the Treasury and Tynwald was notified. The response of the Treasury is at Appendix 2. 1 under paragraph 4.4(1)(iii) of the Schedule to those Standing Orders to "consider any financial matter relating to a Government Department or Statutory Body as may seem fit to the Committee". In the terms of reference which we initially set ourselves we identified a number of issues, which are picked up later in the Report:

(i) a 2004 Internal Audit study of what was then known as the Film Fund raised questions as to the sustainability of the Fund in the medium to long term. Now is an appropriate time to follow those questions up; (paragraphs 5.10 to 5.14)

(ii) after receiving the Internal Audit Report in 2004 and considering the accounts of Isle of Man Film Limited in 2005, the previous Public Accounts Committee picked up on some other points including succession planning. There could be value in following up on this now to see what has been done; (paragraph 4.17 to 4.19)

(iii) the accounts for the fund (page 35 of Appendix 5 of our report on Reserve Funds, PP39/09) and for Isle of Man Film Limited (included within Appendix 7 of PP39/09) show significant income under the heading "recoupment" (09.8 million in 2007/08). There was a critical question as to whether "recoupment" represented real income to the Island from outside investors, as was claimed; (paragraph 3.11)

(iv) given the changes in fiscal policy affecting the transfer of revenue funding to reserves and the Media Development Fund in particular, we believe questions should be asked as to how well prepared the fund is to be able to sustain film investment into the future (paragraphs 5.15 to 5.28)

(v) we noted the unclear division of responsibilities which existed between Treasury and DTI in respect of this fund which may have obscured respective roles and responsibilities of the two departments; (paragraph 3.19) and

(vi) the accounts are complex and we considered that there was potential for that complexity to inhibit transparency and accountability. (paragraph 4.6)

1.5 We had appointed a Sub-Committee in January 2008 to lead our work on reserve funds in general. The Members of the Sub-Committee were Mrs Christian (chair), Mr 2

Henderson and Mr Watterson. Following the conclusion of its work on the wider reserve funds Report (PP39/09), the Sub-Committee recommended to the full PAC that it continue in operation in order to lead work on the Media Development Fund. This recommendation was accepted by the full PAC. Under Standing Order 5.11 of Tynwald Court a sub- committee cannot report to the Court. Accordingly the Sub-Committee reported to the full Public Accounts Committee and this report represents the considered conclusions of not only the Sub-Committee but the whole of the Public Accounts Committee.

1.6 The Sub-Committee met to consider the current investigation on eleven occasions. The Sub-Committee's draft report was considered by the full Public Accounts Committee at four meetings.

1.7 The Sub-Committee took written evidence from the Treasury, DTI and CinemaNX Limited. It heard oral evidence in private from Treasury and DTI officers, and also from Steven Christian of CinemaNX Limited. The written evidence quoted in this Report is available for inspection in the Tynwald Library. The Internal Audit Report has been lightly redacted in response to a request by the current Chief Internal Auditor: the redactions do not affect the parts of the Report which are central to our concerns.

1.8 As required by Standing Order 5.10(3), we have considered whether oral evidence should be taken in public and recorded. We have determined that private oral evidence was only taken to clarify the Committee's understanding of systems, definitions and documents. As the evidence-gathering was largely technical in nature, there was no benefit in holding it in public.

1.9 The Chairman of the Committee, Mrs Clare Christian MLC, was appointed a Member of the Department of Trade and Industry during the course of this investigation. We took the view that this did not represent a conflict of interests because the lead role for the issues under investigation lay with the Treasury and not the Department of Trade and Industry. Mrs Christian therefore continued to participate in the investigation.

2. THE EVOLUTION OF FILM FINANCING ARRANGEMENTS IN THE ISLE OF MAN: KEY EVENTS AND DATES

2.1 The Isle of Man Film Commission was created in 1993 under the auspices of the Department of Tourism and Leisure with a remit to attract film production to the Isle of Man as part of the Government's diversification policy. The duties of the Commission were transferred in July 1996 to the Department of Trade and Industry and in April 2010 to the Department of Economic Development. 2

2.2 In 1995 the Isle of Man Film Commission was set up within the DTI. The Commission had the following objectives: (1) to facilitate the provision of assistance and advice to the film industry relating to Isle of Man legislation, regulations and working practices. In particular, work permits, trainee placements, location permissions, local crew provision and contractual obligations etc; (ii) to oversee the development and distribution of relevant marketing material through appropriate channels and the provision of public relations information to the media, relating to the Isle of Man film industry; and (iii) to consider initiatives for the further development of a film industry in the Isle of Man. 3

2.3 On 19th March 2002 the Treasury Minister, Mr Bell, announced in his first Budget speech the creation of the Media Development Fund, a new fund which would supplement the money already available in the DTI's annual revenue budgets. He referred also in his speech to a new financial "mechanism". This was to be Isle of Man Film Limited, a company limited by guarantee whose sole member is the Treasury. Isle of Man Film Limited was incorporated on 17th June 2003.

2.4 On 4th June 2004 the Internal Audit Division of the Treasury produced a report entitled "Film Fund (Administration and Expenditure)", based on detailed audit work carried out from April to December 2003. The then Chief Internal Auditor, Mr Clive McGreal, commended the efforts made by the Isle of Man Film. Commission in developing

2 Tynwald Written Answer, 20th May 2008, page 945. 3 Letter dated 28th May 2009 from the DTI to the Committee. 4

the film and media industry to its then current position. However, he also identified a number of concerns, including succession planning, sustainability and local spend. We have followed up on these matters and they are discussed later in this Report.

2.5 It is a matter of public record that the new revenue sharing arrangements between Isle of Man Government and the UK came into effect on 1st April 2007. Meanwhile, in December 2006 the Island's film production industry had suffered a major disruption brought about by tax relief changes introduced by the UK Government. 4

2.6 The Isle of Man Film Limited model had been evolving gradually since it was announced in 2002 but the tax relief changes of 2006 necessitated a step change in the Government's approach to the financing of the film industry. A new company, CinemaNX Limited, was incorporated on 22nd February 2007 and was alluded to by the Treasury Minister in his budget speech on 20th March 2007.

2.7 A presentation was made to Tynwald Members on 2nd October 2007 on how the new financing model involving CinemaNX Limited was to work. The operation of this model is described later in this Report.

4 Tynwald Written Answer, 20th May 2008, page 946. 5

3. SUPPORTING THE FILM INDUSTRY IN THE ISLE OF MAN: DESCRIPTION OF THE FOUR FINANCIAL MODELS USED SINCE 1995

1995 TO 1997: TAX CREDIT SCHEMES

3.1 The initial funding to attract film makers to the Isle of Man came by way of two tax credit schemes approved by Tynwald in 1995 and 1996. Each scheme was for £1 million with £350,000 being the maximum value of tax credits allowed in each film. These tax credits were traded with a local bank in exchange for funding towards the film budget. The DTI added to this the potential for a loan of up to £150,000 thus making the package of assistance available to film producers at that time up to £500,000. These arrangements, which were administered by the DTI, supported the making of the first seven films. 5

1997 TO 2003: DIRECT GRANTS FROM DTI TO PRODUCERS

3.2 In 1997/98 the funding for the development of the film industry was put on a more permanent basis and Treasury agreed, through the budget process, an annual allocation on a three-year rolling basis. This arrangement covered the years 1997/98 to 2004/05 as follows:

Year Allocation (E 1997/ 98 3.0 1998/ 99 3.0 1999/2000 4.0 2000/ 01 4.5 2001/02 5.0 2002/ 03 5.5 2003/ 04 5.5 2004/05 5.0

5 Letter dated 23rd June 2009 from the DTI to the Committee. 6

3.3 During this period the Isle of Man Film Commission (Department of Trade and Industry) would normally make an investment of up to 25 per cent of production budget provided a production met certain requirements which were publicly stated. A formal report on each potential production was submitted by the consultants to the DTI for consideration. Applications were first assessed by Film Commission staff and then, if deemed acceptable, referred to the Film Commission Board and the DTI Chief Executive. If they approved the proposal they were required to seek Treasury concurrence before contracts were signed. Under this model financial assistance, once finally approved, was provided by the DTI direct to the production company. 6

3.4 Towards the end of this period the Film and Television Fund was superseded by the Media Development Fund, a transfer of £4,380,944 being made from the Media Development Fund in 2002/03 in order to close the Film and Television Fund, and the first advances, loans and guarantee payments being paid out of the Media Development Fund in 2003/04.7 We asked the Treasury to explain why the closure of the Film and Television Fund required a transfer from the Media Development Fund. They explained that the transfer was needed to meet outstanding liabilities of the Film and Television Fund. 8

3.5 When the Isle of Man Film Commission was established in 1995 it had one member of staff at EO level. By mid-January 2004 it consisted of two HEOs, one EO, one AO and a student placement. 9

2003 TO 2007: ISLE OF MAN FILM LIMITED

3.6 In 2002 to 2003 new arrangements were put in place which involved changes both to administrative structures and to financial flows. Previously the Isle of Man Film Commission had undertaken the two primary functions for establishing the Isle of Man as a

6 These two paragraphs are based on the DTI's letter to the Committee of 23rd June 2009 together with information in the 2004 Internal Audit Report, paragraphs 45 to 46. 7 Treasury written evidence to the Committee dated 20th February 2008 (previously published in PP39/09, Appendix 5), page 35. 8 Letter from the Treasury dated 31St December 2009, point (iii). 9 2004 Internal Audit Report, paragraphs 22 and 41. 7

centre for film production: promotion and investment. The promotion aspect meant encouraging film production companies to consider the Isle of Man as a location and promoting the Island's advantages and benefits. The investment function involved critically assessing production scripts etc with a view to providing financial support. This arrangement was thought to have created confusion with production companies and it was decided to separate the two functions.

3.7 The promotional function remained with the Isle of Man Film Commission. In 2006, to reflect the more modern and commercial structures that had been put in place to attract film-makers, the Isle of Man Film Commission was renamed "Isle of Man Film". By then it had five full-time members of staff. 10

3.8 Meanwhile the investment function was moved to Isle of Man Film Limited, a company limited by guarantee wholly owned by the Treasury. This provided greater clarity to film-makers, through the creation of a separate company with a separate trading identity. The new company was incorporated on 17 1h June 2003 and became operational from the autumn of that year. 11

3.9 Under the Isle of Man Film Limited financing mechanism, grants were no longer to be paid directly from the DTI to film production companies. Instead, money was to be paid from the Media Development Fund (controlled by the Treasury) into Isle of Man Film Limited and from there to the producers of a film. A typical investment would involve Isle of Man Film Limited investing 25 per cent of a film's total budget in return for a priority position over North American revenues arising from the sale of the film. Additionally, Isle of Man Film Limited would be actively involved in investing against the tax breaks available to film producers from the UK Government, typically in the region of 15 per cent of the film's budget. Following completion of a film, Isle of Man Film Limited would arrange for the sale of the North American rights and collection of the UK tax relief. 12 All investment recovered in this way was to be returned to the Media Development Fund (reported as "recoupment recharge" in the company's accounts). Meanwhile transfers were also to be

10 Letter dated 28 ,h May 2009 from the DTI to the Committee. 2004 Internal Audit Report, paragraph 51. 12 Treasury Paper 167-07 (February 2007). 8 made into the Media Development Fund from general revenue to grow the capacity of the Fund.

3.10 We have examined the accounts of Isle of Man Film Limited together with the accounts of the Media Development Fund and a description of the model included within the 2004 Internal Audit Report. We found it difficult to reconcile the two sets of accounts and we raised this with the Treasury. As a result they engaged in discussions with DTI in an effort to make the reconciliation and transparency between the two sets of accounts more informative for 2008/09.13 This was a most welcome development.

3.11 With reference to one of the initial matters which we identified at the outset (paragraph 1.4(iii) above), we obtained explanations from Treasury and DTI officers as to what is meant by "recoupment" in the two sets of accounts. In the accounts of Isle of Man Film, the "recoupment recharge" is a sum paid back by the company to the Media Development Fund to ensure the company itself does not make a profit. A breakdown of

" recoupment" in the Media Development Fund was provided in Clive McGreal's written evidence to the Committee dated 17th July 2008 and expanded upon in his letter of 2nd March 2009 (at paragraph (iii)). We have concluded that while some of the transactions reported as "recoupment" merely reflect the repayment of advances made by the Fund paid out to assist producers with cashflow etc, there is an element of "recoupment" which does represent genuine new income to the Island.

3.12 The key question is how much new income is there, as compared with the amount of money being put in by the Government in the first place? This issue is considered further under the heading "Sustainability" (paragraphs 5.10 to 5.28).

2007 ONWARDS: CINEMANX LIMITED

3.13 The CinemaNX Limited model was set up in 2007 with the new company, CinemaNX Limited, established to handle the financing of new projects. (The existing

13 Letter dated 20th April 2009 from the Treasury to the Committee, point (vi). 9 company, Isle of Man Film Limited, still exists because it holds contracts with distributors for films already made and it will still be able to receive income from these and pass it on to the Media Development Fund.) Isle of Man Film (formerly the Isle of Man Film Commission) continued to operate within the DTI, promoting the Island as a film location and offering practical assistance to visiting production companies.

3.14 We have studied a file of corporate details on CinemaNX Limited and a set of draft CinemaNX Limited accounts supplied to us by the Treasury together with the Agreement dated 13th August 2007 between the Treasury, Isle of Man Film Limited and CinemaNX Limited which is the governing document of the company. There are some significant differences between CinemaNX Limited and Isle of Man Film Limited:

• Isle of Man Film Limited is a company limited by guarantee wholly owned by the Treasury. CinemaNX Limited is owned by private individuals. No Government Department is a shareholder although the Treasury does exercise an element of control through the Agreement;

• in Isle of Man Film Limited the Directors are the DTI Minister and Chief Executive and the Treasury's Financial Controller, together with Steven Christian and Andrew Fingret. In CinemaNX Limited four Directors have been private individuals (Steven Christian, Andrew Fingret, Gillian Duffield - who resigned in September 2009 - and Marc Samuelson) and one is the Financial Controller. Under the Shareholders' Agreement, the Financial Controller has less influence on the company's decisions than the other Directors;

• with Isle of Man Film Limited, the company would invoice the Treasury for "grant in aid" in respect of particular projects. With CinemaNX Limited, although Treasury approval is still required for each individual investment, the entire balance of the Media Development Fund (around £50 million) has already been effectively handed over to the company. This allows CinemaNX Limited to use the income arising on the Media Development Fund balance as a management charge to cover its working

10 capital requirements. 14 Treasury described this arrangement to us by saying that "CinemaNX essentially acts as a Fund Manager to the Treasury"; 15

• Isle of Man Film Limited does not make a profit. As noted above, any surplus it might generate is transferred back to the Media Development Fund. CinemaNX Limited on the other hand may make a profit. Under the CinemaNX Limited arrangements, the Treasury is entitled to 20 per cent of CinemaNX Limited's profits annually(but would not share in any losses), while the Media Development Fund is entitled to the bulk of any profit shares generated by any individual film;

• while CinemaNX Limited is still expected to invest in films made in the Isle of Man, it is permitted in certain circumstances to invest in other films. It was explained to us that this could be, for example, to complete a trilogy of films in circumstances where the first two films had been shot in the Isle of Man but it was not appropriate to shoot the third here.

3.15 When the new arrangements were being explained to Members of Tynwald in October 2007, it was stated that the previous regime was perceived to be relatively isolated, able to handle limited capacity and over-reliant on Steven Christian and Hilary Dugdale. The anticipated benefits of the new regime were to include:

• improved deal flow;

• improved production timing;

• greater influence on the project;

• ability to explore year-round television production;

• ability to produce lower-budget but more home-grown production;

14 Treasury Paper 167/07. 15 Letter dated 2nd March 2009 from the Treasury to the Committee, item (ii). 11 • ability to explore commercials production;

• expanded expert team and correspondingly reduced reliance on Steven Christian and Hilary Dugdale.

3.16 Steven Christian has expressed his aspirations for CinemaNX Limited as being to continue to attract filmmakers to the Isle of Man; to consider the long term acquisition of strategic media assets; to forge relationships and partnerships with other media partners that will enhance our longer term media ambitions; and to devise unique selling points (USPs) that will enhance the attractiveness of the Isle of Man as a filmmaking/media friendly location.

3.17 One particular feature of the agreement between the Treasury and CinemaNX Limited was a requirement that CinemaNX Limited make arrangements to provide the Treasury with two seats for the UK premiere of each completed film. According to the DTI, 16 since 2002 only two premieres have been attended by politicians from the Isle of Man. Mr Leonard Singer MLC (who was a DTI Member at the time) attended the London premiere of "The Heart of Me" on 21st November 2002 and Mr Alex Downie MLC (who was DTI Minister at the time) and Mr Singer attended the London premiere of "Stormbreaker" on 17th July 2006. Although not a premiere, the current DTI Minister Hon David Cretney MHK attended the Royal Film Performance in London of "A Bunch of Amateurs" in November 2008. He also attended the BAFTA awards ceremony in February 2009.

3.18 With the creation of CinemaNX the financial responsibility for investment in film production transferred from the DTI to the Treasury and the number of staff in Isle of Man Film within the DTI was reduced. Having been as high as five, this number had fallen by May 2008 to three, 17 and by May 2009 to two.18

3.19 This relatively recent change in responsibilities goes some way towards explaining why, at the outset of our investigation, we identified that there might be a role conflict between the Treasury and the DTI in this area. Having completed the investigation we

16 E-mail from the DTI dated 22nd July 2009. 17 Tynwald Written Answer, 20th May 2008, page 946. 18 Letter dated 28th May 2009 from the DTI to the Committee. 12 consider that, whilst there may have been a lack of clarity in the past as to the respective roles of Treasury and the DTI, this has been resolved in the new Departmental structure which took effect from April 2010. That said, it is a feature of complex administrative landscapes such as this that necessary actions can sometimes fall between stools. We would urge the officers of both Departments, and in particular the Chief Officers, to make clear arrangements to ensure that this does not happen.

4. KEY ISSUES OF CONCERN (1): GOVERNANCE ISSUES

TRANSPARENCY AND ACCOUNTABILITY

4.1 As a company limited by guarantee incorporated in the Isle of Man in 2003, Isle of Man Film Limited produces audited accounts which are available for inspection by the public. In March 2005 the company's 2004 accounts were laid before Tynwald. In March 2009 their accounts for 2005 meanwhile were included as part of our report on Reserve Funds (PP39/09) at Appendix 7. In October 2009 their accounts for 2006, 2007, 2008 and 2009 were laid before Tynwald.

4.2 When, in 2007, the arrangements with CinemaNX were being set up, no consideration appears to have been given to whether Tynwald should have a say in such a novel departure. The idea was put to Treasury by Steven Christian in January 2007 and set out in more detail in a formal Treasury paper written in February 2007. The new arrangements were alluded to by the Treasury Minister in his budget speech in March 2007 but the comments in the Pink Book were vague and there was no explicit motion on the Tynwald Order Paper. It might be argued that this was no different from a decision to place funds with any other external fund manager, something which the Treasury is expected to do as a matter of routine without always seeking Tynwald approval. However, given the high profile of the film industry and the degree of new risk involved, we believe that specific approval should have been sought from Tynwald.

4.3 In the Treasury paper of February 2007 proposing the new arrangements, Treasury was asked to approve in principle an FD8 waiver. Such waivers are normally sought by other Departments, and in these circumstances it makes sense in corporate governance terms for the decision to lie with the Treasury. However, we were concerned about the present circumstances because it appeared that Treasury was submitting a waiver application to itself. We asked Treasury if any mechanism was in place to ensure that, where an FD8 waiver was sought by Treasury, it fell to be approved by the Council of Ministers. Treasury confirmed that, although the waiver in the case of CinemaNX was subsequently 14

approved by the Council of Ministers, there was no standing procedure to cover this scenario. We believe that such a procedure should be put in place and accordingly we make the following recommendation.

RECOMMENDATION 1

That Financial Regulations be amended to ensure that, where an FM waiver is sought by the Treasury itself, such a waiver shall not be granted unless it is first approved by the Council of Ministers.

4.4 The agreement is now in place and CinemaNX Limited, unlike Isle of Man Film Limited, is a 2006 Act company whose accounts need not be filed at the Companies Registry. We were grateful to the company for supplying us with a copy of the company's draft accounts to 30th June 2008, which they did through the Treasury on 4th June 2009. We have discussed the draft accounts with Steven Christian and Clive McGreal and subsequently received the finalised audited financial statements.

4.5 We note that in 2007 the company received the entire balance of the Media Development Fund, some £50 million which is available for investment subject to Treasury approval on a project by project basis. This is a significant sum of public money and we have therefore decided to make the audited 2008 accounts public by placing them in the Tynwald Library.

4.6 With reference to one of the issues identified at the beginning of our investigation, regarding the complexity of the landscape within film finance, we have concluded that the landscape is genuinely complex and there are real commercial sensitivities about releasing too much information. However, it is also the case that the Treasury and CinemaNX are handling large sums of money on behalf of Tynwald and the public. We believe that more could be done by the Treasury to explain what is being done with that money, how it is being done, and why.

PERFORMANCE MANAGEMENT, TARGETS AND APPROVALS

4.7 In our report on the management and use of reserve funds in general we looked at the issue of fund performance and examined the investment mandates for externally managed funds. We concluded that we were content with the arrangements. 19 When it came to the Media Development Fund, Treasury explained to us that, since 2007, CinemaNX Limited essentially acts as a Fund Manager to the Treasury. Treasury has invested the £50 million balance of the Media Development Fund with CinemaNX Limited. Although Treasury has a supervisory role through its presence on the CinemaNX Limited Board and the requirement for Treasury approval of particular projects, CinemaNX Limited has been given a high degree of independence and flexibility to achieve such return on the Government's investment as it can.

4.8 We therefore asked the Treasury what performance criteria they applied to CinemaNX Limited in their capacity as fund manager. Did the Treasury expect as good a rate of return on their investment with CinemaNX Limited as with other external fund

managers? The Financial Controller wrote: 2°

"Since the change to CinemaNX there have been two underlying goals (both inter-linked); being to continue attracting film production to the Island while at the same time seeking ways to use the Media Development Fund to leverage strategic media opportunities for the Isle of Man in pursuit of economic development and diversification. Both aims are being met."

4.9 When we asked how CinemaNX Limited demonstrated to the Treasury that the aims were being met, they wrote that: "Treasury are represented on the Board of CinemaNX and are, therefore, kept closely informed on all relevant strategic issues". 21 We infer from this response, and from the Agreement between CinemaNX Limited and the Treasury, that no specific financial performance target has been set for CinemaNX Limited in their capacity as fund managers. We would also point out that the performance of CinemaNX Limited does not appear to be monitored by the Investment Committee of the Treasury as is that of other fund managers but acknowledge that Treasury officers do meet with Steve Christian at least

19 PP39/09, paragraph 6.6. 20 Letter dated 2nd March 2009 from the Treasury to the Committee, paragraph (vi). 21 Letter dated 20th April 2009 from the Treasury to the Committee, paragraph (vii). 16 twice a year and receives regular updates on matters pertaining to the industry and individual investments.

4.10 We asked the Treasury to explain the procedure for Treasury approval of particular investments. The Treasury response established that in the first instance any prospective investment would be reliant on the report and recommendation made by CinemaNX Limited in their submission to the Treasury. These reports would be examined by the Corporate Strategy Division who would challenge the commercial criteria and potential risks and return on the investment and make a recommendation if appropriate for approval by the Treasury. 22 This illustrates the high reliance on and trust placed in a small number of key individuals. Transparency would be improved if Treasury were to publish a benchmark "return on investment" against which the performance of CinemaNX will be established.

POTENTIAL CONFLICT OF INTEREST

4.11 Internal Audit noted in 2004 that specialists hired on a consultancy basis to provide legal and film development services were only paid a fee for productions where an investment was actually made. They commented that this could encourage the consultants to recommend marginal productions for investment when this might not be in the interests of the Film Commission. 23

4.12 The issue has not gone away. We learned from the accounts of Isle of Man Film Limited that the following sums were paid out each year in "producer fees":

Year Producer fees (E) 2003/ 04 595,915 2004/ 05 843,085 2005/ 06 913,250

The Notes to the Accounts explain as follows:

22 Letter dated 6 ,h August 2009 from the Treasury to the Committee. 23 2004 Internal Audit Report, paragraph 53. 17 "Isle of Man Film Limited has no responsibility to pay fees to third parhj advisors in respect of individual transactions, however, Isle of Man Film Limited invoices and collects, legal and production fees on behalf of Cains Advocates and Gasworks Media Ltd respectively. Isle of Man Film Limited is only responsible for paying such fees to the extent that they are first recovered from third parties, thus not exposing Isle of Man Film Limited to any net third party transaction costs."

4.13 We are content with this explanation as far as it goes but we noted that the leading players in Cains Advocates and Gasworks Media Ltd were Andrew Fingret and Steven Christian respectively - both of whom are Directors of Isle of Man Film Limited. We asked the Treasury if there was a risk that Mr Fingret and Mr Christian might be under a perverse incentive to encourage Isle of Man Film Limited to pursue mediocre projects, given that their other companies stood to earn "producer fees" from any project pursued? The Financial Controller responded that there were a number of factors which had mitigated any such risk:24

• all fees were payable firstly to Isle of Man Film Limited, rather than to Mr Fingret and Mr Christian, thus ensuring transparency;

• all films were majority financed by third parties who would assess for themselves the financial risks and rewards of each film and would typically be avoiding mediocrity;

• all fees were approved by Isle of Man Film Limited, the DTI and the Treasury on a case-by-case basis and were subject to a minimum (00,000) and maximum (E50,000) fee level in respect of producer fees;

• compared to other providers of film investment, Isle of Man Film Limited's charging structure has been considered by Treasury to be heavily discounted; 25

• there has to be a degree of trust in these matters.

24 Letter dated 20th April 2009 from the Treasury to the Committee, paragraph (iii). 25 See letter dated 31 , December 2009 from the Treasury, point (v). 18 4.14 We are reasonably content with the reassurances given by the Treasury and acknowledge the risk in such circumstances where there is reliance on a small number of key individuals.

4.15 This issue is not only of historical interest. In the accounting period ending 30th June 2008 substantial fees were paid by CinemaNX Limited to Gasworks Media Limited (Steven Christian) and to Samuelson Productions Limited (Marc Samuelson). Samuelson Productions Limited also recharged costs in respect of rent, rates and services. All of these transactions were incurred on an arm's length basis.

INVESTMENTS BY CINEMANX LIMITED

4.16 CinemaNX Limited owns 100 per cent of the ordinary share capital of a variety of special purpose vehicles to finance various productions. We reviewed the corporate documents, accounts and charges for each of these companies and these did not give rise to any concerns.

RESILIENCE AND SUCCESSION PLANNING

4.17 When the previous Public Accounts Committee considered the accounts of Isle of Man Film Limited in 2005 they were advised by the Treasury that there were certain key figures in the industry who would be difficult to replace in the short term - namely Steven Christian and Andrew Fingret. It was noted that action needed to be taken to ensure succession planning in respect of Steven Christian, and the Committee followed up on this action in correspondence with the DTI throughout 2005. This matter was noted at the start of the present investigation (paragraph 1.4(ii) above).

4.18 In the presentation in October 2007 Members of Tynwald were advised that the new CinemaNX Limited arrangements were intended to reduce reliance on Steven Christian and

19 Hilary Dugdale. During the course of our investigation Mr Christian provided us with the following further explanation:

"I am not sure how familiar your Committee is with my present role in NX CinemaNX Limited], Essentially, I am responsible for devising film/media policy and strategy for the long-term benefit of NX, the MDF and the IOM. Mr Fingret (media lawyer) and Mr Samuelson (film producer and executive) have jointly taken over the bulk of my pre-NX role. That being the packaging, negotiating and general closing of deals. This was a requirement of Treasury. That is, that the local film industry would be sustainable without my involvement. A requirement that arose, I understand, from the previous, very exhaustive enquiry of the MD .F made by your Committee. My absence would no longer be an impediment to the continuation of the local industry."

4.19 We accept this reassurance and we acknowledge the efforts made by the Treasury to respond to our predecessors' concern.

5. KEY ISSUES OF CONCERN (2): RETURN ON INVESTMENT

LOCAL SPEND

5.1 Before the establishment of the Media Development Fund as a mechanism to collect exchequer benefits, attempts were made to quantify the financial benefit arising from investment in film by estimating local spend. For example, in his budget speech in March 2002 the Treasury Minister reported to Tynwald that 37 films had been shot on the Island generating some 100,000 bed-nights for local hoteliers as part of an estimated local spend of £23 million. Based on the information above, the amount of the Government's investment by this time was £2 million in 1995 to 1997, plus £19.5 million from 1997 to 2002, making a total of £21.5 million.

5.2 As part of the Isle of Man Film Commission's terms and conditions as described by Internal Audit in their 2004 report, any film production company benefiting from investment by the Film Commission was required to provide budget forecasts which showed that more than 20 per cent of the production budget, excluding the costs of the principal cast, story and script editors' and producers' and directors' fees (i.e. 20 per cent of "below the line" costs), would be "approved expenditure". Approved expenditure was defined as "Island based expenditure made by the Isle of Man resident production services company with Isle of Man based individuals and companies.

5.3 Internal Audit noted in their report that the ongoing funding of the Media Development Fund was not dependent on the return to Government from local spend. This was because, as set out above, under the Isle of Man Film Limited mechanism as it operated up to March 2007, the Media Development Fund itself benefited both from direct returns from film distribution and from indirect receipts to the exchequer. Nevertheless, local spend continued to be calculated and in the presentation to Members in October 2007 a figure of £67 million local spend for the first 86 films was quoted.

5.4 Local spend remains important under the CinemaNX Limited arrangements. The agreement between the Government and CinemaNX Limited includes a set of standard terms to apply to all projects financed out of the Media Development Fund. Among these there is a requirement that CinemaNX Limited shall, where reasonably practicable, contractually require of the relevant production company that the ingoing budget for a project shall include provision for a minimum local audited expenditure on goods and services in the Isle of Man to be not less than 20 per cent of the "below the line" costs. CinemaNX is also, where reasonably practicable, to ensure that fifty per cent of shooting take place on the Isle of Man - although as noted above the possibility exists to fund a film with no shooting in the Island at all.

5.5 How is the Treasury to satisfy itself that the 20 per cent has been adhered to? In 2003/04 Internal Audit were concerned that, as the production companies' statements of local spend had been independently audited, they had not been reviewed by Film Commission staff for reasonableness but had been accepted at face value. Internal Audit made a detailed study of the audited local spend figure in respect of three productions. They found that the local spend figures included a number of items which should not have been considered local spend under the terms and conditions. On the basis of this sample they calculated that the figure taken as likely to accrue to Government general revenue as a result of local spend had been overstated by almost 60 per cent. 26

5.6 Management did not accept this conclusion. The DTI accepted that there had been some inconsistencies regarding classification of local spend but they maintained that these were not material. They said that they did now review the figures for reasonableness and that all queries had been, and would continue to be, resolved.

5.7 We looked at the methods by which local spend is calculated today. The DTI confirmed that it is still assessed by the independent auditors appointed by each individual production company. They showed us an example of the kind of local spend statement which is supplied by such auditors. We noted that the auditors in the example supplied were a UK-based firm and we are concerned that there could still be some inaccuracy in the reporting of local spend. We make the following recommendations.

26 2004 Internal Audit Report, paragraphs 13, 29 and 48. 22

RECOMMENDATION 2

That the Treasury review the methodology for defining "local spend".

RECOMMENDATION 3

That the Treasury take steps to foster the development of a film audit specialism within the Island's financial sector, with the aim of improving the confidence Tynwald can place in statements of local spend.

5.8 We are concerned that the stark difference of opinion between Internal Audit and management on this important issue appears never to have been resolved. We asked the current Chief Internal Auditor about follow-up work to the 2004 report. He wrote: 27

"I can advise that Internal Audit Division has not undertaken any formal follow up work since the original review was undertaken.

"As I understand it the primary reason for this was that following the original review many changes were made, such as the creation of "Isle of Man Film". These would have had a significant impact on the administration associated with the investment of Government finds in film projects and as such any planned formal follow up work was suspended.

"The Film Fund Administration was identified during our 2008 audit identification process, the business element now sitting with CinernaN X Limited. However given its risk profile compared to other areas across government, it is not planned to be subject to a systematic review in our three year planning horizon."

5.9 We are disappointed that no follow-up was undertaken by Internal Audit on such an important report, particularly when our predecessors on the Public Accounts Committee

27 Letter dated 23rd January 2009 from the Chief Internal Auditor to the Committee. 23 had shown such interest in the original report. We recognise that Internal Audit has to balance a range of priorities across Government but we do not accept that the working through of the change to Isle of Man Film Limited rendered the whole 2003/04 audit findings obsolete. The issue of local spend in particular we regard as unfinished business and we would encourage the Internal Audit Division to see if it can be resolved. They are better equipped than we would be, for example, to undertake a further sampling exercise on some more recent film auditors' statements of local spend.

SUSTAINABILITY OF THE MEDIA DEVELOPMENT FUND (1): BEFORE 2007

5.10 We believe that the development of the film industry has been beneficial for the Island in terms of economic diversification and from a reputational point of view but we are bound to ask at what financial cost this has been achieved? The fundamental question is what financial return there has been on the investment the Government has put in?

5.11 As mentioned above, the establishment of the Media Development Fund was announced on 19th March 2002 by the Treasury Minister, Mr Bell, as part of his first Budget speech. He said:

"I propose to make a transfer of £25rn to this fund to facilitate not only investments in the higher-quality productions that are now knocking on our door, but also to fund the development of an infrastructure, with appropriate Tynwald approval, which will enable a greater proportion of the film industry's activities to be undertaken here on the Island... By the end of 2004-05, the Department of Trade and Industry intends that the industry should be in a position to be self-financing, by means of a mechanism that will be established, with the agreement of the Treasury, to enable the new fund to retain and re-invest a proportion of the income that it generates for the Island,"

5.12 The new mechanism - Isle of Man Film Limited - was to be fundamental to the ongoing sustainability of the fund. The Internal Audit report completed in June 2004 was based on detailed audit work carried out in 2003 when the Isle of Man Film Limited mechanism was in its infancy. At that time, based on analysis of films made between 1998

24 and 2002 under the previous financial regime, the then Chief Internal Auditor concluded that "ongoing sustainability of the Film Fund is unlikely over the longer term given the pattern of its present rate of returns which are insufficient to cover future investment on the existing scale... The overall wealth generation is exceeding its [i.e. the Fund's] direct investment. However, only a proportion of that wealth is returned to the Film Fund at the present time which will not sustain activity in the longer term without improved financial returns...".28 Six months later, in December 2004, the then Financial Controller advised the Committee in private that the Media Development Fund would not be self-perpetuating. And as recently as June 2009 the Chief Executive of the DTI wrote to us that: 29 "It is my understanding that the Fund [under the Isle of Man Film Limited arrangements] would not be self perpetuating if it had to be solely reliant on the recoupment of investments." He went on: "This expectation was no different to the expectation in 2002."

5.13 However, the Media Development Fund did not have to be solely reliant on the recoupment of investments and given the other direct and indirect benefits to the exchequer and economy in general the Committee accepts that there has been a significant overall return on the historic public investment in the film industry.

5.14 The Committee identified certain shortcomings of the DTI in being unable more readily to identify, demonstrate and evidence the overall value of these exchequer returns because of the nature of the various activities and different means by which they are accounted for.

SUSTAINABILITY OF THE MEDIA DEVELOPMENT FUND (2): AFTER 2007

5.15 A central question going forward is whether, and if so to what extent, CinemaNX Limited can generate a return on the Government's investment now that the VAT arrangements have changed. The Treasury Minister in his budget speech on 20th March 2007 was non-committal:30

28 2004 Internal Audit Report, paragraphs 14 and 15. 29 Letter dated 23rd June 2009 from the DTI to the Committee, paragraph (iv). 30 Hansard for 20th March 2007, page 334. 25 "From 2007-08 a new model is required to enable the film sector to grow further. This will involve the external investment of the Media Development Fund directly into film projects, subject to the control of Treasury, and dependent on the individual submissions. Film finance is a complex area; but suffice it to say that Treasury, along with its advisers, will continue to seek the maximum return for the minimum risk, and seek to continue to use this industry as a springboard for other economic development activities."

The wording of the 2007 Pink Book was similarly careful:

"From 2007-08 no fitrther transfer of benefits will be made into the Fund, and instead it will be placed with external managers [i.e., CinemaNX Limited] to invest in film production, subject to Treasury approval over individual investments. This will allow a wider range of projects to be considered. Treasury will retain its position in recouping its return on each investment and share in the profits of the investment management company as well as being able to rely on a wider range of experienced professionals in providing advice over suitable investments."

We have examined what Treasury's expectations are, and what they are doing to see if these expectations are being met.

5.16 In written evidence to the Committee at the outset of the wider reserve funds investigation, Treasury made the following statement: 31 "The Treasury acknowledges that in respect of each Proposed Investment there is no fixed intention as to terms of each Proposed Investment and each such Proposed Investment shall be considered on its merits by CinemaNX and Treasury." Treasury officers commented to us in one meeting that CinemaNX were required to share profits with the Government, but not losses. 32

5.17 The Financial Controller wrote in a later letter: 33

31 Written evidence to the Committee dated 20th February 2008, page 16. 32 Treasury oral evidence dated 9th July 2008 (previously published in PP39/ 09 as Appendix 9), paragraph (iii)(f). 33 Letter dated 2nd March 2009 from the Treasury to the Committee, paragraph (vi). 26 "When [the Media Development Fund was] set-up in March 2002 the underlying emphasis was creating a formula that provided as little financial risk as possible. The establishment of a mechanism to demonstrate that indirect tax receipts from the film and media sector could be re-directed to the MDF would promote an ethic of self financing and sustainability for the investment fiend. This continued to be the emphasis throughout the life of the fund, until the new arrangements with CinemaNX came into being. Since the change to CinemaNX there have been two underlying goals (both inter-linked); being to continue attracting film production to the Island while at the same time seeking ways to use the Media Development Fund to leverage strategic media opportunities for the Isle of Man in pursuit of economic development and diversification. Both aims are being met."

5.18 In another letter (signed by the DTI Chief Executive) the Treasury provided the following contribution on the CinemaNX Limited arrangements: 34

"The initial expectations were that the new fund would sustain a part investment in up to six films per annum. It was expected that CinemaNX Limited would secure other investors so that there would be a syndicate of investors in each film thereby sharing the investment risk. The Island would benefit directly from the local film production spending and subsequent investment returns and indirectly from the positive international exposure provided by the publicity involved.

The assessment of whether expectations are being met is made by the following process: (a) For each proposed investment a report is produced by GasWorks Media on behalf of CinemaNX which includes sales estimates produced by the sales agents. Each report is reviewed by Treasury in advance of the investment decision being made and questions asked and answered as necessary. (b) CinemaNX Limited formally attends a Treasury meeting twice a year. In practice Steve Christian, director of Cinemanx Limited meets Treasury more frequently. (c) Treasury's Financial Controller, Clive McGreal sits on the board of CinemaNX Limited. Board meetings are held bi-monthly during which past productions and forthcoming potential investments are reported upon. (d) CinemaNX produces a quarterly investment report for Treasury."

Letter dated 23rd June 2009 from the DTI to the Committee, sections (vi) and (vii). 27 5.19 When we pressed the Financial Controller to forecast the projected return expected of CinemaNX Limited he indicated that each film investment should seek to break even. Similarly Mr Steven Christian stated to the Committee that underlying the various expectations he had for CinemaNX Limited was the desire to at least maintain the original MDF balance whilst creating economic benefit along the way.

5.20 It is admittedly early days but the following table gives some indication of how far CinemaNX Limited has to go before even that modest aspiration is realised. It shows the amount invested, and return received, by CinemaNX Limited up to 31st March 2010: 35

Date of UK NX NX release investment receipts from investment to 31.03.10 to 31.03.10

A Bunch of Amateurs 19 Dec 2008 (2,911,000) 486,141 Me and Orson Welles 4 Dec 2009 (11,723,782) 1,376,798 Alice Creed 30 Apr 2010 (850,000) 39,830 Heartless 22 May 2010 (1,415,000) 315,294 Wild Target 18 Jun 2010 (2,825,848) Albatross (1,645,000) Chico & Rita (1,078,423) TT 3D (2,661,409)

Total (25,110,462) 2,218,062

5.21 In the context of mainstream investment management, a target that each investment break even would not be acceptable compared to existing benchmarks for fund managers. We asked the Treasury for information by way of comparison on the kinds of fees which might be earned by "mainstream" investment managers responsible for investing a sum like £50 million on behalf of Government. According to the information we were given, the nearest comparator in terms of the size of the fund would be the Hospital Estate Development Fund which had a market value at 31st March 2009 of just under £48 million.

35 Source of financial figures: e-mail dated 20th July 2010 from the Treasury to the Committee. UK release dates have been added from Isle of Man Film website and other internet sources. 28 The fee paid for the management of this fund in the 12 months to 315 1 March 2009 was £86,315.36

5.22 We conclude that CinemaNX Limited is not being treated as a fund manager. We noted the explanation of the Treasury that any direct comparison with other discretionary fund managers was not strictly relevant, despite this having been their initial analogy. CinemaNX Limited is effectively managing one investment with a mandate to attract inward economic activity and will, we were told, typically be self-generated. Treasury stated that in essence CinemaNX Limited will seek out and evaluate the opportunity, structure the investment, negotiate the commercials of the deal, effect the legal arrangements, oversee the entire production, financing and distribution aspects and monitor the income stream for years afterwards. The nature of this type of investment management service is very different from the "plain vanilla" investment manager role traditionally associated with Treasury's other investment funds.

5.23 We believe that the Treasury should publish in clear terms the investment target it has set for CinemaNX; and that, if that target does not in itself bear comparison with other investment managers, then Treasury should also publish its wider film strategy and explain to Tynwald and the public how they are assessing the less tangible benefits they attribute to the activities of the film industry in general.

SUSTAINABILITY OF THE MEDIA DEVELOPMENT FUND (3): CONCLUSION AND RECOMMENDATION

5.24 To summarise our findings on this central issue of sustainability, we would say that the Media Development Fund appears to have achieved what it was set up to do between 2002 and 2007, but that on the success of the post-2007 arrangements there still remains a lack of evidence. The eight years since 2002 have seen a steady reduction in the Treasury's aspirations. In March 2002 the Treasury Minister said in his Budget speech:

36 E-mail from the Treasury dated 1s , March 2010. 29 "I believe that there are few investment opportunities for the development of the economy of the Island that afford the same potential for the future as the film and media industry." In March 2007 he said: "Film finance is a complex area, but suffice it to say that Treasury, along with its advisers, will continue to seek the maximum return for the minimum risk." And in 2009 we find that the Treasury is hoping merely that each investment will: "wash its face".

5.25 Prior to April 2007 the film and media industry in the Island underwent five years of successful development in terms of its reputation, people, skills etc. The number of films made in the Island increased from 37 to 86, some of which may continue to generate revenue. As to the future, even if the industry continues to operate under the current model, there are a number of questions still to be asked. How profitable will it be? Will there be any tangible return on the Government's £50 million investment over five years? If so, how will the return compare to the performance of funds placed with more conventional external fund managers? Will it justify the amount of time devoted to CinemaNX Limited by the Treasury and in particular by the senior official required to act as a Director of the company?

5.26 We recognise that the Treasury have taken difficult decisions in agreeing to the new arrangements with CinemaNX Limited, and we accept that under the circumstances it is not possible to eliminate all risk. We do not underestimate the amount of work which has been put in by the Treasury, the DTI and the CinemaNX principals themselves. For the remainder of the existing contract period we would, however, urge the Treasury to remain hard-nosed and to demand evidence of tangible returns on its investment. Accordingly we make the following recommendation.

RECOMMENDATION 4

That Treasury and the Department of Economic Development jointly publish, by December 2011, a specific financial performance target for CinemaNX Limited - such target to be accompanied by details of any performance management framework in place in respect of the less tangible benefits attributed to the activities of the film industry in general.

30 5.27 For the future, it may still be too early to come to a final conclusion on all the unanswered questions. On the basis of the evidence before us, however, we are seriously concerned that those answers, when they come, will show that the model adopted in 2007 may not be sustainable in the financial environment in which the Island now finds itself. We are uncomfortable with Government's exposure to the levels and concentration of commercial risk represented by the CinemaNX Limited arrangement. We are not at all convinced that the arrangement should be renewed in its present form, without Tynwald approval, when the five-year contract period ends in 2012. Rather, we think serious consideration should be given to reverting to a much more conventional mode of operation, in which the film industry would take its place with other industries bidding for any available Government support through loan schemes under the Enterprise Act 2008 or other mechanism. Accordingly we make the following recommendation.

RECOMMENDATION 5

That Treasury and the Department of Economic Development consider options for the longer term support and development for the film and media industry post August 2012, including possible alternative models, and report to Tynwald by December 2011.

5.28 In line with the recommendations of our previous report on Reserve Funds we consider that the detail of any new scheme or mechanism should be put to Tynwald for approval.37 Even before that stage is reached, however, it is essential that Tynwald be properly consulted as to any broad change of course. Accordingly we make the following recommendation.

37 See PP39/09, paragraphs 2.6 to 2.7 and recommendation (iii). 31 RECOMMENDATION 6

That any extension of the agreement dated 13th August 2007 between the Treasury, CinemaNX Limited and Isle of Man Film Limited, or any similar agreement by way of replacement, should only occur with the approval in principle of Tynwald.

6. POSTSCRIPT: FOLLOW-UP ON PAC'S 2006 RECOMMENDATIONS (ISLAND FILM STUDIOS AND RELATED MATTERS)

6.1 In October 2006 the Public Accounts Committee published a report entitled "Island Film Studios and Related Matters" (PP135/06). The report was debated on Tuesday 17th October 2006 and all of its 14 recommendations were approved on a division with no-one voting against.38 The recommendations related to the procedure for handling grant applications across all sectors of the economy, not just the film industry.

6.2 When we embarked on the present investigation we first looked in the Government's Annual Tynwald Policy Decisions Reports to see what progress had been made in the implementation of the recommendations. We were surprised to find no reference to this motion in either of the 2007 or 2008 Tynwald Policy Decisions Reports. We drew this omission to the attention of the Scrutiny Committee who reported on it in their 2009 Annual Report.39

6.3 We asked the Chief Secretary's Office for an update and their reply is at Appendix 1. The reply consists of a covering letter dated 29th January 2009 from the Chief Secretary's Office, a letter dated 27th January 2009 from the DTI, and a letter and enclosure dated 6th August 2007 from the Committee to the DTI.

6.4 On the substantive issues covered in the Island Film Studios report, we are broadly content with progress. One of the key issues in that report was succession planning for the purposes of assessing grant applications. The written update provided said: 40

38 Tynwald Hansard for 17th October 2006, pages 1894 to 1899. 39 Annual Report of the Scrutiny Committee for the Session 2008/09 (PP49/09), paragraphs 3.15 to 3.17. 40 Letter dated 27th January 2009 from the DTI to the Chief Secretary's Office, Recommendation (xiv). 33

"In terms of succession planning all applications for financial assistance are dealt with in house and are not dealt with by third party consultants as was the position at the time of the Public Inquiry. The evaluation process is led by the Director of Finance and supported by officers from the Economic Development Group and the Finance Office."

6.5 We discussed this evaluation process with the DTI's Director of Finance and we were content with the explanation given.

6.6 As far as further reporting to Tynwald is concerned, Tynwald has already resolved, on a recommendation of the Scrutiny Committee, that the decisions made on "Island Studios and associated matters" on 17th October 2006 should be reported on in the 2009 Tynwald Policy Decisions Report and handled in the same way as other Tynwald policy decisions thereafter. 41 However, there is an outstanding matter regarding the precise wording of those decisions still to be cleared up.

6.7 As indicated in the letter dated 6th August 2007 from the Committee to the DTI within Appendix 1, following Tynwald's approval of the Committee's recommendations on 18th October 2006, the Chief Executive of the Department had discussed the wording of the recommendations with the Committee. This discussion took place on 27th June 2007. The Department had put forward a series of suggested amendments to the recommendations. Some of these were accepted by the Committee and some were not.

6.8 Because the recommendations had by then already been approved by Tynwald, it was agreed during the meeting that the amendments should also be put to Tynwald for approval. This is because it is not open to the Public Accounts Committee of its own devices to alter any decision of Tynwald, irrespective of whether that decision arose from a recommendation of the Public Accounts Committee in the first place. The Committee's letter

of 6th August 2007 made it clear that as far as the Committee was concerned, it was up to the Department to put the amendments to Tynwald if they so wished. It would then be up to Tynwald whether to accept the amendments - but the Committee said that if the approved version of the amendments were put forward, they would receive the Committee's support.

41 Annual Report of the Scrutiny Committee for the Session 2008/09 (PP49/09), paragraph 3.20. 34 6.9 It would appear from the first paragraph of the letter dated 27th January 2009 from the Chief Executive of the DTI within Appendix 1 that this position was not fully understood in the Department. They appear to have regarded the Committee's August 2007 letter as an end to the matter. This would explain why they based their report to the Chief Secretary's Office on the amended recommendations as agreed by the Committee. This approach ignores the fact that a Tynwald resolution can only be amended by a further resolution of Tynwald.

6.10 We are pleased that the DTI appears to have accepted the version of the recommendations put forward by the Committee in August 2007. However, we are disappointed that the Department has not put the amendments to Tynwald as we had expected them to do. In any case, rather than get into a protracted procedural dispute about an issue which has effectively been agreed between the Committee and the Department, we are taking the opportunity of the present Report to set the Tynwald record straight. Accordingly we make the following recommendation.

RECOMMENDATION 7

That the following amendments to the resolution approved by Tynwald on 17th October 2006 at item 19 of the Order Paper be approved:

(a) In recommendation (iii) of item 19, the wording of conditions regarding local contractors/suppliers is amended as follows: "The Company to undertake to obtain quotations based on the same written specification from local contractors/suppliers and/or producers for all goods and materials specified in the works and to give preference to local Isle of Man labour, tradesmen and services and to use materials from Isle of Man- based producers and/or suppliers. If there are valid reasons why the Company prefers to employ an off-Island contractor, the prior approval of the Department is required for all goods and services in excess of the limits set out in FM, paragraph 12. If such prior approval is not obtained the Department will withhold payment of the grant."

(b) In recommendation (v) of item 19, concerning cases where a grant 35 applicant's own building company is to be used, the first sub-paragraph is amended as follows: "at the discretion of the Department and to ensure best value is obtained, either quotes should be obtained from that company and at least two other building companies based on the same written specification and submitted to the Department, or an independent expert (building orgtialtiLty surveyor) assess the applicant's proposed quotation".

(c) Recommendation (vi) of item 19, concerning cases where the Department is to have a charge over the assets of grant recipients, is reworded as follows: "(a) the Government Valuer should prepare a valuation of the land and/or buildings assets prior to the award of the grant; (b) in respect of assets other than land and/or buildings, the Government Valuer shall obtain an independent valuation from an appropriate specialist; and (c) the period of the charge should commence from the date of the payment of the initial instalment of grant monies and extend for a40-year period the period of the terms and conditions from the date of payment of the final instalment.

(d) Recommendation (ix) of item 19, concerning a proposed referral to HM Attorney General, is deleted.

(e) Recommendation (xiii) of item 19 is amended as follows: "Company searches be obtained on all new applicant companies for which grant applications are being considered. This should extend to other companies in the same group as the applicant company and companies with which the applicant company is to enter into partnership."

36 7. CONSOLIDATED LIST OF RECOMMENDATIONS

7.1 The following are the recommendations of this Report.

RECOMMENDATION 1

That Financial Regulations be amended to ensure that, where an FD8 waiver is sought by the Treasury itself, such a waiver shall not be granted unless it is first approved by the Council of Ministers. (paragraph 4.3)

RECOMMENDATION 2

That the Treasury review the methodology for defining "local spend". (paragraph 5.7)

RECOMMENDATION 3

RECOMMENDATION 4

37 RECOMMENDATION 5

RECOMMENDATION 6

RECOMMENDATION 7

That the following amendments to the resolution approved by Tynwald on 17th October 2006 at item 19 of the Order Paper be approved:

(a) In recommendation (iii) of item 19, the wording of conditions regarding local contractors/suppliers is amended as follows: "The Company to undertake to obtain quotations based on the same written specification from local contractors/suppliers and/or producers for all goods and materials specified in the works and to give preference to local Isle of Man labour, tradesmen and services and to use materials from Isle of Man- based producers and/or suppliers. If there are valid reasons why the Company prefers to employ an off-Island contractor, the prier approval of the Department is required for all goods and services in excess of the limits set out in FD8, paragraph 12. If such prier approval is not obtained the Department will withhold payment of the grant."

(b) In recommendation (v) of item 19, concerning cases where a grant applicant's own building company is to be used, the first sub-paragraph is amended as follows: "at the discretion of the Department and to ensure

38 best value is obtained, either quotes should be obtained from that company and at least two other building companies based on the same written specification and submitted to the Department, or an independent expert (building or quantity surveyor) assess the applicant's proposed quotation".

(c) Recommendation (vi) of item 19, concerning cases where the Department is to have a charge over the assets of grant recipients, is reworded as follows: "(a) the Government Valuer should prepare a valuation of the land and/or buildings assets prior to the award of the grant; (b) in respect of assets other than land andJor buildings, the Government Valuer shall obtain an independent valuation from an appropriate specialist; and (c) the period of the charge should commence from the date of the payment of the initial instalment of grant monies and extend for a 10 year period the period of the terms and conditions from the date of payment of the final instalment.

(d) Recommendation (ix) of item 19, concerning a proposed referral to HM Attorney General, is deleted.

C M Christian (Chairman) Q B Gill (Vice Chairman) D M W Butt G D Cregeen R W Henderson J P Watterson

39 40 APPENDIX 1

"ISLAND STUDIOS AND RELATED MATTERS"

Letter dated 29th January 2009 from Chief Secretary's Office, with attachments

41 42

CHIEF SECRETARY'S OFFICE

'S.IPSSZWEEM:4137,w242.1EMIZZLZeni=agariragZZVALgOga isle of Man Ork yn Ard-scrudeyr Government Reiltys Eifan Vin Government Office DOUGLAS Isle of Man. IM1 3PN Direct Line (01624) 685200 Fax No. (01624) 685710 email: cso©gov.im

All Correspondence to be addressed to CHIEF SECRETARY THE CHIEF SECRETARY M. Williams, CPFA

Your reference: Our reference:

29th January 2009

Jonathan King Clerk to the Public Accounts Committee Legislative Buildings RECEIVED Douglas j IM1 3PW p, 2 FEB 200g OFFICE OF THE CLERK Or TYNWALD Dear Jonathan

Island Studios and Associated Matters

I write further to your letter dated 14 th January 2009 regarding the request from the Public Accounts Committee with regard to the implementation of the COmmittees recommendations on the above subject.

Please find attached a letter from the Department of Trade and Industry outlining the actions taken by the Department in response to the recommendations.

I am unsure as to why the recommendations were not reported as part of the Tynwald Policy Decisions Report. I would be grateful for the Committees guidance as to whether they would wish for the subject to be included within the Report for 2008/09.

Please feel free to contact me again if you require any further assistance.

Yours sincerely

Rose Dawson Policy and Research Officer

Enc.

Department of Trade & Industry Rheynn Dellal as Jeadys Chief Executive's Office Hamilton House Jste of Man Chief Executive Peel Road, Douglas Government Chris Corlett IM1 5EP Telephone (01624) 682352 R.eiltys Ellan Van n in Fax (01624) 682355 e-mail chris.corlett©gov.im Our Ref: Your Ref:

27th January 2009

Rosemarie Dawson CHiEF SECRETAR\IS OFFICE Policy and Research Officer f' Council of Minister's Division ,... Chief Secretary's Office Central Government Office ,.. Fi EAD BY (:,--:. Bucks Road FIL1- AVVAY jiit-.'' j Douglas _TO RELEVANT (-);=1;'('PE C ''''i '''t F .__ __ ...______Dear Ms Dawson

Re: Public Accounts Committee Report into Island Studios Limited and Associated Matters

I write with reference to your e-mail dated 20 th January 2009 regarding the above matter. May I point out that the document you attached is out of date and not the final version agreed by the Public Accounts Committee (PAC). Following the Tynwald debate on the PAC report into Island Studios the Department wrote to the PAC seeking a number of amendments to the recommendations a number of which the Committee subsequently agreed to. Please find enclosed a copy of a letter dated 6 th August 2007 from the Clerk of Tynwald's Office together with the amendments agreed by the PAC.

In order to provide the Committee with an update on the implementation of the recommendations I have set out below each recommendation of the PAC and listed immediately below it the actions taken by the DTI:

Recommendation (I) DTI should introduce a more standardised procedure for evaluating grant applications, to ensure that all applicants are given the same treatment and are given equal consideration. The final decision must be taken by the Department and minuted.

Action taken by DTI Enquiries of a general nature continue to be dealt with by officers of the DTI. This covers a number of situations up to the point an application form is completed and submitted to the DTI.

When a formal application form has been completed and submitted to the DTI, a set procedure is followed to ensure a consistent approach is applied. Applications are only considered to be complete when all information is received. Applicants are allowed three months, after the submission of the application form, to submit any outstanding information, otherwise the application is deemed withdrawn and the applicants written to accordingly.

1 All completed applications are subject to a formal decision by the Department either at a Department meeting or through the delegated system. Decisions are based on a completed full evaluation or by a short form report, if appropriate.

Recommendation (ii) Before a grant is given in respect of a specialised facility, a condition of the grant should be that the applicant satisfies the Department that the specification of the facility ensures that it will be fit for purpose.

Action taken by DTI This recommendation was accepted and the guidelines and procedure notes have been amended accordingly. It should be noted that there are few cases where a specialised facility is developed.

Recommendation (iii) Conditions regarding local contractors/suppliers be worded as follows:

"The Company to undertake to obtain quotations based on the same written specification from local contractors/suppliers and/or producers for all goods and materials specified in the works and to give preference to local Isle of Man labour, tradesmen and services and to use materials from Isle of Man based producers and/or suppliers. If there are valid reasons why the Company prefers to employ an off-Island contractor, the approval of the Department is required for all goods and services in excess of the limits set out in FD8 paragraph 12. If such approval is not obtained the Department will withhold payment of the grant.

Action taken by DTI The Department accepted the changes which do improve the procedures and in particular make clear that the prior approval of the Department is required before using off-Island contractors and suppliers. The terms and conditions, guidelines, offer letter and procedure notes have been amended accordingly.

Recommendation (iv) DTI reviews their procedures:

a. to ensure that grant recipients are made aware of their responsibilities for ensuring that all workers on their site have the relevant work permits and certification, and b. for checking sites to ensure that this requirement is being adhered to.

Action taken by DTI Regarding part a) the DTI makes grant recipients aware of their responsibilities in relation to work permits and certification in both the standard terms and conditions applied to offers of financial assistance and emphasised further in the covering offer letter to the applicant.

Regarding part b) a widespread review of the Contol of Employment Act and its administration took place in 2007 and the DTI has increased the resources of Employment Inspectorate in order to adopt a more rigorous approach towards enforcement of the relevant employment legislation and clear enforcement guidelines have now been published.

4' In addition, the Inspectorate have significantly increased the number of random visits to organisations to ensure compliance with employment legislation.

The Inspectorate does not seek to target a particular sector of the economy, but rather aims to ensure a range of visits to encompass as large a percentage of the economically active population as possible.

Recommendation (v) In cases where a grant applicant's own building company is to be used:

a. at the discretion of the Department and to ensure best value is obtained, either quotes should be obtained from that company and at least two other building companies based on the same written specification and submitted to the Department, or an independent expert (building or quantity surveyor) assess the applicant's proposed quotation b. a satisfactory certificate should be provided confirming that all the expenditure claimed is allowable, and c. that a proportion of the grant monies be retained until such certificate is produced.

Action taken by DTI The Department accepted the above conditions and has included them in the standard building conditions as well as the procedure notes and the guidelines.

Recommendation (vi) In cases where the Department is to have a charge over the assets of grant recipients:

a. the Government Valuer should prepare a valuation of the land and/or buildings assets prior to the award of the grant, b. in respect of assets other than land and/or buildings, the Government Valuer shall obtain an independent valuation from an appropriate specialist, and c. the period of the charge should commence from the date of the payment of the initial instalment of grant monies and extend for the period of the terms and conditions from the date of payment of the final instalment.

Action taken by DTI All of the above recommendations were accepted and documentation has been amended accordingly. Since October 2006, the Government Valuer has been asked for valuations on four occasions.

Recommendation (vii) Auditor's certificates must be obtained from independent and appropriately qualified professionals, who must certify that they have no connection with the applicant.

Action taken by DTI This recommendation was accepted and the documentation has been amended accordingly.

4-7 Recommendation (viii) In cases where a grant is given towards the purchase of plant or equipment and one of the conditions is that the grant be repayable under certain circumstances, a further condition be attached to the grant requiring the recipient to maintain an adequate register of assets which should include serial numbers, current value, location and whether the plant/equipment is still in use by the grant recipient. The register must be kept up to date for the whole of the period under which the grant could become repayable.

Action taken by DTI The Department agreed with this recommendation and has included a condition in the standard terms and conditions for plant and machinery to this effect. Around 70 offers have been issued where this condition has been included since it was first introduced in October 2006.

Recommendation (ix) The purchase of the editing equipment for £689,800 and subsequent grant application in respect of it be referred to HM Attorney General for further investigation.

Action taken by DTI The PAC has agreed to the removal of this recommendation as the Attorney General's Chambers has already declined to undertake an investigation,

Recommendation (x) DTI reviews its procedure for:

a. assessing grant applications, especially in respect of specialist projects where there may be insufficient local knowledge to adequately check the information contained in the business plans, and b. checking all invoices which are submitted in support of grant payments to ensure that they are all allowable under the terms of the grant award.

Action taken by DTI Both these recommendations have been implemented and procedure notes amended accordingly.

Recommendation (xi) DTI reviews its follow-up procedure to ensure that:

a. regular visits are carried out by the same officer(s) wherever practicable; b. there should be a clear understanding of the issues to be covered in those checks; and c. there should be a written record of each visit which would include the date, the officer(s) who undertook the visit and the findings.

Action taken by DTI These recommendations were accepted and procedure notes amended accordingly.

Recommendation (xii) DTI should introduce a qualifying condition for Employers' registration under the Craft and Technician Training Scheme and similar Schemes stipulating that the Employer must award accredited qualifications, which are recognised by the relevant industry, to all apprentices who successfully complete their courses.

Action taken by DTI The Craft and Technician Training Scheme was expunged in 2006. However, the replacement Skills Development Scheme (2007) does now contain the following wording: "Wherever possible, successful completion of the training should lead to the attainment of industry accredited, nationally recognised qualifications." Due to the expansion of alternative training and assessment methods, all of the Department's 450 apprentices are studying towards nationally recognised qualifications.

Recommendation fxiii) Company searches be obtained on all new applicant companies for which grant applications are being considered. This should extend to other companies in the same group as the applicant company and companies with which the applicant company is to enter into partnership.

Action taken by DTI This recommendation has been implemented and procedures have been amended to ensure that searches are carried out on new applicant companies. Checklists have been put in place in this regard.

Recommendation (xiv) DTI should examine its grant appraisal procedures:

a. to ensure succession planning and cover in cases of the incapacity or unavailability of the current service providers; and b. to ensure that appropriate expert advice is available in respect of all grant applications.

Action taken by DTI These recommendations were accepted and the guidelines amended accordingly. In terms of succession planning all applications for financial assistance are dealt with in house and are not dealt with by third party consultants as was the position at the time of the Public Inquiry. The evaluation process is led by the Director of Finance and supported by officers from the Economic Development Group and the Finance Office.

Since the Public Inquiry it is worth noting that the DTI has developed a new Enterprise Act which includes powers in relation to our main Financial Assistance Scheme. Royal assent has been obtained and it is now proposed to bring the Act in to force as soon as is practically possible.

This new legislation requires the DTI to be more open and transparent about the way the Financial Assistance Scheme is administered. In this regard, the DTI is required for the first time to produce an Annual Report on the financial assistance given and this has to disclose the names of businesses in receipt of assistance. This report must be laid before Tynwald each year.

The Department is required to produce Regulations to define what constitutes an eligible business and this will set down a minimum standard of criteria which applicants must meet. The Department is also required to produce comprehensive guidelines to show in an open and transparent way, how it administers policy in relation to financial assistance. The DTI's main Financial Assistance Scheme is subject to regular review and audit by Treasury's Internal Audit Division. The most recent audit resulted in a report in December which confirmed the Department was complying with all requirements and a copy of the completed Treasury report was forwarded to the Public Accounts Committee,

I trust that all the information supplied is acceptable, but if you have any further queries, please do not hesitate to contact me further.

Yours sincerely

Chris Corlett Chief Executive OFFICE OF THE CLERK OF TYNWALD Legislative Buildings, Douglas, \ Isle of Man, British Isles, IM1 3PW7 / f Our ref: C/PaSC3 /me 0 7 AUG 2007

661 August 2007

Mr C Corlett .Department of-Trade and Industry Illiam Dhone House Circular Road Douglas

Dear Mr Corlett

PUBLIC ACCOUNTS COMMITTEE : REPORT ON ISLAND STUDIOS LTD

Further to your meeting with the above Committee re your Department's proposed amendments to the recommendations contained in the above Report, the Committee has now considered your proposals. I am enclosing a copy of the original recommendations incorporating the amendments in the form in which they have been approved by the committee (additions are underlined and deletions are scored through).

If your Department now wishes to place a Report before Tynwald recommending that the attached amendments be approved, it will receive the support of the Committee.

Please contact me if you need any further information.

Yours sincerely

Mrs M Cullen Clerk to the Committee

5-1 S-9- Standing Committee on Public Accounts Report on Island Film Studios and associated matters

Original recommendations including amendments approved by PAC.

RECOMMMENDATION iii PAC recommends that conditions regarding local contractors/suppliers be worded as follows:

"The Company to undertake to obtain quotations based on the same written specification from local contractors/suppliers and/or producers for all goods and materials specified in the works and to give preference to local Isle of Man labour, tradesmen and services and to use materials from Isle of Man-based producers and/or suppliers. If there are valid reasons why the Company prefers to employ an off-Island contractor, the prior approval of the Department is required for all goods and services in excess of the limits set out in FD8, paragraph 12. If such pr-isr approval is not obtained the Department will withhold payment of the grant."

RECOMMENDATION i-Nr' PAC recommends that in cases where a grant applicant's own building company is to be used: a. at the discretion of the Department and to ensure best value is obtained, either quotes should be obtained from that company and at least two other building companies based on the same written specification and submitted to the Department, r independent u ti surveyorIrve or ) assess the applicant's proposed quotation", b. a satisfactory certificate should be provided confirming that all the expenditure claimed is allovable, and c. That-a proportion of the grant monies -be retained -until such certificate is produced.

RECOMMENDATION vi PAC recommends that in cases where the Department is to have a charge over the assets of grant recipients — a. the Government Valuer should prepare a valuation of the land and for buildings assets prior to the award of the grant, in res sect of assets other than land and or buildin s the Government Valuer shall obtain an inde endent valuation from an a nate s ecialist and the period of the charge should commence from the date of the payment of the initial installment of grant monies and extend for a 10 y ar period the period of the terms and conditions from the date of payment of the final installment.

RECOMMENDATION viii PAC recommends that, in cases where a grant is given towards the purchase of plant or equipment and one of the conditions is that the grant could be repayable under certain circumstances, a further condition be attached to the grant requiring the recipient to maintain an adequate register of assets which should include serial numbers, current value, location and whether the plant/equipment is still in use by the grant recipient. The register must be kept up to date for the whole of the period under which the grant could become repayable. (DTI proposed amendment rejected)

RECOMMENDATION ix

further investigation. Committee decision: No objection to the removal of this recommendation, as AG has already declined to undertake an investigation.

RECOMMENDATION xii PAC recommends that DTI should introduce a qualifying condition for Employers' registration under the Craft and Technician Training Scheme and similar Schemes stipulating that the Employer must, wherever possible, train towards the award of an.. accredited qualification, which is recognised by the relevant industry, to all apprentices who successfully complete their courses. (Committee decision: DTI proposed amendment rejected)

RECOMMENDATION xiii PAC recommends that company searches be obtained on all new applicant companies for which grant applications are being considered. This should extend to other companies in the same group as the applicant company and companies with • which the applicant company is to enter into partnership. APPENDIX 2

TREASURY RESPONSE TO THIS REPORT

55 56 The Treasu isle of Man Yn Tashtey Government Chief Financial Officer P M Shimmin CPFA Reiltys Ellrsa Vni ■ stin Government Office, Douglas Isle of Man, British Isles Mr 3 King IM1 3PX Clerk of the Public Accounts Committee Telephone (01624) 685586 Fax (01624) 685662 Legislative Buildings E-mail Douglas Government Website: www.gov.im IM1 3PW ECEIVED Quoting Ref: CSD/KCM/CFO/PAC Your ref: 12 NOV 2010 Date: 10th November 2010 OFFICE OF THE CLERK OF TYNWALD

Dear Mr King

Re: Media Development Fund and Public Investment in the Film Industry 1995 - 2009

I acknowledge your letter of 4th August 2010 together with the attached report of the Standing Committee on Public Accounts referenced above (PP105/10).

It is further acknowledged that Treasury were afforded an opportunity to comment upon the draft report prepared by the Committee earlier this year and note that a number of amendments, although not all, have been incorporated into the final report.

I should like to place on record that Treasury is mindful of the accountability and transparency objectives sought by the Committee and fully acknowledge their work undertaken in producing the report on this complex subject.

Whilst the Committee will already be in possession of the earlier Treasury comments and response to the recommendations made in the report these are formally set out at Appendix I to this letter.

In respect of the main body of the report I should like to point out a few issues upon which Treasury would wish to make particular comment:

1. Publication of CinemaNX Ltd Accounts: -

Para 3.14 of the report refers to the "draft" accounts and similarly para 4.5 refers to the audited 2008 accounts of CinemaNX Ltd which are to be placed in the Tynwald Library.

It remains the Treasury view that publication of the audited accounts for CinemaNX Ltd (an TOM 2006 Company) is inappropriate and represents a serious concern and dangerous precedent in respect of those companies wishing to safeguard commercially sensitive and confidential information which would not otherwise be available in the public domain. 2, • Internal Audit Follow Up: -

Treasury note the disappointment of the Committee in respect of the absence of any follow up activity by the Department's Internal Audit Division in relation to further analysis into "local spend" of film investments. However, it should be acknowledged that each investment is subject to rigorous audit scrutiny recognised under film industry reporting standards which must satisfy "UK Tax Credit Rules" as an integral part of the structure of film finance.

Whilst the Internal Audit function retains an independence from the direction of Treasury in its ambit to appraise operations across the whole Government the opportunity for it to review and validate the "local spend" attached such film investment remains open. Any further work of the Internal Audit Division will be assessed using a risk based methodology as appropriate.

3. Control of the Media Development Fund: -

There are a number of references throughout para 3.14 which may give the impression that the control and influence exercised by the Treasury over the Media Development Fund may be less than adequate.

Such extracts as —

(i) "Treasury does exercise an element of control". (ii) "the Financial Controller has less influence". (iii) "the balance of Media Development Fund has been effectively handled over the Company".

If taken out of context may imply that Treasury control has been abdicated. In respect of (iii) above the explanation previously offered by Treasury stated that "the Media Development Fund has been vested with the company and is effectively held within a charged account under the control of Treasury". The Committee has chosen not to include this comment in the final report.

Treasury maintain that it retains control over the Media Development Fund and also sets the strategic target within which CinemaNX Ltd operate to deliver particular projects. It is accepted that this is achieved within a framework that facilitates flexibility and a degree of independence entrusted to the specialist team appointed for the very purpose of promoting and sustaining the Isle of Man Film Industry.

Treasury is concerned that there remains an implied doubt that the strategic aims are not being met but the report does not demonstrate or contain any evidence that there is anything fundamentally wrong,

4. Sustainability of the Film Industry: -

Treasury acknowledge that the Committee did consider the resilience and succession planning of the local industry including the commentary from Mr Christian set out at para 4.8. I

Whilst it is clear that the CinemaNX model has strengthened the position in this regard the clear views from both the Department of Economic Development (with responsibility for Film) and the Treasury remain that Messrs Christian and Fingret from CinemaNX Ltd are key players to any successful future of the industry.

5, Financial Benefit to the Island: -

Treasury would agree with the Committee's statement at para 5.1.3 and fully support the conclusion "that there has been a significant overall return on public investment in the film industry".

The fact that the residual Media Development Fund is only a portion of the surplus generated over the years is also acknowledged as indeed the wider economic benefits accruing to Isle of Man PLC attributed to the film industry and its positive impact of crossover marketing on other sectors of the economy are difficult to quantify.

Some of the findings within the report remain inconclusive and unsubstantiated in part especially to the uninitiated reader, However, the main conclusion of the report that the current investment philosophy into single films is becoming increasingly difficult to sustain must be recognised as both Treasury and the Department of Economic Development seek to evolve and research for new opportunities for media related activities. The extent to which the approval of Tynwald should be sought in relation to the definition, application and use of such funds is commensurate with the previous recommendations accepted from the Report on Reserve Funds however, the extension of such approval to matters of commercial contracts within the respective authority of individual Government Department Ministers is an interesting proposition and one which I would respectfully suggest properly falls to the appropriate department in the routine administration of policy.

P M Shimmin Chief Financial Officer Co Appendix 1

Summary Recommendations

Treasury Response to the PAC Report Media Development Fund and Public Investment In the Film Industry 1995 - 2009

RECOMMENDATION 1

That Financial Regulations be amended to ensure that, where an FD8 waiver is sought by the Treasury itself, such a waiver shall not be granted unless it is first approved by the Council of Ministers.

(paragraph 4.3)

Response: -

The Financial Regulations are made by Treasury under the authority of Section 3 of the Treasury Act 1985 "to supervise and control all matters relating to the financial affairs of the Government."

These Regulations apply to all "designated bodies" defined for the purposes of the Regulations across the whole spectrum of Government.

Although the Treasury cannot give directions to itself it is accepted that these Regulations will apply to Treasury and its officers.

The Financial Regulation (FD8 Tenders) relates to the requirement to seek competitive tenders for the purchase of goods and services.

In the circumstances outlined in this report the Treasury did seek the approval of the Council of Ministers to its decision to appoint CinemaNX Ltd in the absence of competition to effectively manage investments from the Media Development Fund.

Treasury exercise a robust degree of scrutiny over all application requests from Government Departments in respect of any waiver to the competitive tender provisions of FD8.

Whilst the Treasury rarely exercise such provisions in favour of any FD8 application from within its own Department it has on occasion granted such FD8 waivers. However, in some circumstances it has elected to refer the matter to the Council of Ministers for approval.

The preferred position would be for Treasury to determine each case on its merits and refer such applications to the Council of Ministers as it considered appropriate. RECOMMENDATION 2

That the Treasury review the methodology for defining "local spend",

(paragraph 5.7)

Response: -

The Treasury is of the opinion that the definition of "local spend" in the present context of film budgets is of little consequence and not worth investigating any further. However, Treasury is content to review the methodology currently applied along with the Department of Economic Development.

RECOMMENDATION 3

(paragraph 5.7)

Response: -

As a matter of principle Treasury does not accept that there is any fundamental flaw in the definition or certification of local spend. The current audit process is exhaustive, rigorous and not open to interpretation. These processes currently satisfy the -requirements of a formal certificate to the UK Film Council, UK Auditors, Completion Border and any third party financiers. Treasury maintain the opinion that Tynwald can be reassured and place confidence in such statements.

In respect of the development of a film audit specialism within the Island Treasury is obviously supportive of the idea however, given the relative volume, size and nature of Isle of Man films the market for such work is relatively low value and unlikely to sustain any local industry specialists.

Treasury will take forward the recommendation and test the local financial services sector with the proposal.

RECOMMENDATION 4

That Treasury and the Department of Economic Development jointly publish, by December 2011, a specific financial performance target for CinemaNX Limited — such target to be accompanied by details of any performance management framework in place in respect of the less tangible benefits attributed to the activities of the film industry in general. (paragraph 5.26) Response: -

Treasury accept that the wider less tangible benefits resulting from the historic success of the film industry have not been made explicit in demonstrating the wider economic benefit derived by the Island.

The Treasury will work with the Department of Economic Development in determining appropriate performance targets for CinemaNX Ltd and the film industry in general.

RECOMMENDATION 5

-(paragraph 5.27)

Response: -

Treasury acknowledge that the more traditional methodologies of single film finance are becoming less likely to provide a return on investment as have been generated historically. Efforts to redefine what "media development" will consist of into the future will determine the nature and shape of the industry. Whether this is in the form of video games, mobile advertising, music download, broadcasting services etc, each will be considered on its merits in the final analysis.

Where any changes to the definition, application or use of the current Media Development Fund is concerned Treasury will consult with the Department of Economic Development and seek the approval of Tynwald.

RECOMMENDATION 6

That any extension of the agreement dated 13 th August 2007 between the Treasury, CinemaNX Limited and Isle of Man Film Limited, or any similar agreement by way of replacement, should only occur with the approval in principle of Tynwald.

(paragraph 5.28)

Response: -

Treasury is of the opinion that the commercial agreement concluded through Treasury and Isle of Man Ltd with CinemaNX Ltd was clearly within the authority of the respective Ministers of Treasury and Department of Trade and Industry at the time.

Treasury is opposed to any requirement to obtain the approval in principle of Tynwald to extend or engage any similar agreement for the operational implementation of established agreed and Tynwald policy., RECOMMENDATION 7

That the following amendments to the resolution approved by Tynwald on 17 th October 2006 at item 19 of the Order Paper be approved:

(a) In recommendation (iii) of item 19, the wording of conditions regarding local contractors/suppliers is amended as follows: "The Company to undertake to obtain quotations based on the same written specification from local contractors/suppliers and/or producers for all goods and materials specified in the works and to give preference to local Isle of Man labour, tradesmen and services and to use materials from Isle of Man-based producers and/or suppliers. If there are valid reasons why the Company prefers to employ an off-Island contractor, the -prier approval of the Department is required for all •oods and services in excess of the limits set out in FD8, paragraph 12. If such p,Fier approval is not obtained the Department will withhold payment of the grant."

(b) 'In recommendation (v) of item 19, concerning cases where a grant applicant's own building company is to be used, the first sub-paragraph is amended as follows: "at the discretion of the Department and to ensure best value is obtained, either quotes should be obtained from that company and at least two other building companies based on the same written specification and submitted to the Department, or an independent (building or quanti ty quotation".

(c) Recommendation (vi) of item 19, concerning cases where the Department is to have a charge over the assets of grant recipients, is reworded as follows: "(a) the Government Valuer should prepare a valuation of the land and/or buildings assets prior to the award of the grant; (b) in respect of assets other than land and/or buildings, the Government Valuer shall obtain an independent valuation from an appropriate specialist) and (c) the period of the charge should commence from the date of the payment of the initial instalment of grant monies and extend for the period of the terms and conditions from the date of payment of the final instalment.

(d) Recommendation (ix) of item 19, concerning a proposed referral to HM Attorney General, is deleted.

Response: -

Agreed by Treasury. APPENDIX 3

LIST OF DOCUMENTS AVAILABLE IN THE TYNWALD LIBRARY

Date From To Notes 4 Jun 2004 Internal Audit Division Report Feb 2007 Treasury officers Treasury Paper 167/ 07 20 Feb 2008 Treasury Committee Previously published in PP39/09, Appendix 5. 9 Jul 2008 Note of oral evidence given in private. Previously published in PP39/09, Appendix 9. 23 Jan 2009 Chief Internal Auditor Committee 27 Jan 2009 DTI Chief Secretary's Office 2 Mar 2009 Treasury Committee 20 Apr 2009 Treasury Committee

28 May 2009 DTI Committee

23 Jun 2009 DTI Committee 22 Jul 2009 DTI Committee 28 Jul 2009 Directors of CinemaNX Limited Directors' report and financial statements for the period ended 30th June 2008. 6 Aug 2009 Treasury Committee 31 Dec 2009 Treasury Committee 1 Mar 2010 Treasury Committee 20 Jul 2010 Treasury Committee

65 66 Parliamentary Copyright available trom:

The. Tynwald Library

Legislative Buildings . DOUGLAS Isle of Man IM1 3PW British Isles November 2010 Tel: 01624 685520 Fax: 01624 685522 e-mail [email protected] .im