Feature: Enhancing the PDV offset has been a godsend

This article first appeared in IF Magazine Issue #147

There are only a handful of Australian companies capable of creating visual effects (VFX) at a standard acceptable to the US studios but a year ago they were struggling because the strength of the Australian dollar had eaten away at their ability to compete financially with other highly skilled service providers worldwide.

The Federal Government responded to their plight last May and increased the PDV (post, digital and visual effects) offset from 15 to 30 per cent, allowing international players to claim back nearly one-third of what they spend in Australia when they put in their tax returns.

“If it had not been for the doubling of the PDV offset, Australia’s VFX sector would have contracted drastically and I’m not overstating that,” says Zareh Nalbandian, Sydney-based co-founder and chief executive of Animal Logic. He is adamant that he would not currently be working on the animated Warner Bros feature, The Lego Movie, if the PDV offset had not been increased.

“It (securing work) is about relationships, capability, track record and so on, but at the end of the day, if you can’t make the numbers work, someone else will,” says Nalbandian.

Despite the PDV offset’s attractiveness being enhanced, he says the current financial year has been the most challenging on record for Animal Logic’s VFX division. Others say similar: the PDV offset has been a godsend but times are still tough.

“Without being too dramatic, it has saved the VFX industry over the last 12 months,” says Tony Clarke, company director of Adelaide-based Rising Sun Pictures (RSP), which contributed more than 200 VFX shots to director Gary Ross’s The Hunger Games. “Without it the dollar would have pummelled us out of existence.”

When IF Magazine spoke to Clarke in May, RSP’s 2012 revenues were 60-70 per cent of what they were at the same time last year and it was operating well below capacity at a time of year when everyone is usually busy finishing US blockbusters in time for a Northern Hemisphere summer release.

“We had more than 170 people before Christmas and are down considerably from that so we are shrinking but there is a lot of bidding activity happening.”

RSP also worked on Ridley Scott’s Prometheus, but not to the extent of Sydney-based Fuel VFX, which also provided a significant number of shots for Joss Whedon’s The Avengers.

“There has to be a reason for people to contact you and it has maintained our position of being a favourable destination but has not put us on the top of the pile,” says co-owner Jason Bath of the effect of the increased PDV offset on his business.

"Yeah, possibly,” he says when asked if he would have secured work on The Avengers anyway. “It is still a relationship business and people have to trust you. We have a long track record now with Marvel.”

“I feel confident that we do good work and that clients like to work with us but it requires constant vigilance to keep in touch with everyone and find the opportunities, particularly as the landscape is changing very quickly,” he says. In the same breath he notes that quoting on complex VFX work is a “dark art”.

Fuel’s revenue is evenly divided between television commercials work and film, but about 90 per cent of the film earnings flow in from across the Pacific, a stark indication of how reliant these companies are on American dollars.

“Certainly enquiries have increased but it is difficult to gauge how much work it brought because it would be insulting to be told that the only reason they were coming was because of the PDV offset,” says Simon Rosenthal, Melbourne-based executive producer at Iloura. He is quick to point out that Iloura doesn’t have the longevity of the others. “The starting point for the studios is always finding the companies capable of delivering but our rebate is very attractive and creates very positive vibes.”

Film Victoria’s production investment attraction fund (PIAF), which typically grants projects $150,000 to $300,000 out of a pot replenished by about $1.9 million each year, helped Iloura entice Ted, the feature film directorial debut of Family Guy creator Seth MacFarlane.

“PIAF has been effective at bringing VFX work into the state, especially since the government lowered its PDV offset threshold to $500,000,” says Film Victoria chief executive Jenni Tosi, who also tipped some dollars into Emperor. “It is a great way to build high-end VFX capacity.”

Iloura usually has three or four bids in play at any one time for jobs ranging from $1 million to $20 million, says Rosenthal: “The PDV offset is not just about giving producers significant savings on US tentpole films but also allows producers of smaller projects to shop around.”

He notes that Jenny Fulle, founder of The Creative-Cartel, a US company that specialised in building teams of VFX specialists and animators, has been a great ally of Iloura’s. The relationship began on Priest and was cemented on Ghost Rider, then Ted.

She confirmed from California that facilities in those territories with tax incentives are more attractive but says the first priority is to match the right people together. She used both California’s Tippet Studios and Iloura for the task of animating teddy bear Ted.

“I’m always afraid of having all my eggs in one basket,” she says. “Also, competition is healthy and having companies working together brings out the best in both of them.”

Fulle observes that the Australian dollar has risen by 35 per cent since she started working with Iloura, and also that hardware is more affordable than it’s ever been, that the latest software is capable of more than previously and that an increasing number of people are being trained in VFX.

The behaviour of Hollywood is also impacting on Australia: Clarke believes the major studios are making less sequels and less large spectacle films, and that Canada is winning a lot of VFX work these days. Others mention the rise of eastern and central Europe. He notes that part of Australia’s pain might be due to market perceptions rather than market realities.

“I suspect that the high Australian dollar means people think we are not competitive and they are not even asking (Australian companies to bid) but, in fact, we are quite competitive … It is a very difficult time to build a sustainable business and retain talent even though VFX companies in Australia still do top quality work and have good relationships.”

Whereas the Australian Government has clearly got the PDV offset right in terms of its form —US producers are always commenting that it and the location offset are robust, and easy to understand and administer — perhaps a broader issue needs addressing.

“The strong Australian dollar is choking a lot of industries out of existence, not just ours, because of the success of our mining industry,” says Clarke. “That’s the elephant in the room. Large sections of the Australian economy are hurting including manufacturing, education, retail and tourism. Just take a look at the February insolvency figures, which are at an all-time high. Clearly there needs to be a better balance.”