Big chill for movie makers: Britain's film industry needs cash but it won't find a good audience in the City, writes William Kay

TOMORROW night the threadbare British film industry can expect to collect more than its fair share of Oscars at the annual orgy of self-congratulation in Los Angeles. But when the winners return later this week, they will find the atmosphere in the City and Whitehall as chilly as ever.

Among them is likely to be Lord Attenborough, producer of the acclaimed Shadowlands, which not only features superb performances from Sir Anthony Hopkins and Debra Winger but broke into profit a couple of weeks ago - only three months or so after it went on release in the US.

Cynics may see Shadowlands as the rare exception testing the conventional view that film investment is unpredictable, but it has been a textbook commercial operation. The script is based on a book, play and TV film about the true story of a much-loved author, CS Lewis. A bankable actor is in the lead role and Shadowlands' credits include a director of known quality.

Yet, as Lord Attenborough has been declaiming to anyone who will listen, he had to go to America to finance a film that was otherwise entirely British- made.

Although there have been a few forays into film finance by City institutions, notably The Last Emperor about China's boy-ruler in the early part of this century, there is never any follow-through. So last week the actors Michael Caine, Bob Hoskins and Helen Mirren fronted the launch of a new campaign - the Initiative for Motion Picture Arts, Commerce and Technology (Impact) - in the hope of nudging a few consciences in high places.

Impact wants to regenerate the commercial UK film production industry without tapping taxpayers. But it does want a new Films Act to include financial incentives, accelerated tax write-offs and the abolition of withholding tax on foreign artistes.

The idea is that any tax forgone through such concessions will be more than made up by the extra activity they will inspire. Tom Gutteridge, the film producer and chairman of Impact, said: 'The fact is that 38 per cent of the cost of making a movie goes straight back to the Exchequer in VAT and income tax, and in lower unemployment benefit.'

Peter Brooke, Secretary of State for the National Heritage, the government department responsible for the film industry, has already been glad-handing such luminaries as Lord Attenborough and David Puttnam and plans a policy statement in the next couple of months.

But the omens are not promising. Even before Impact chanced its arm, the UK Treasury had laid down a stern marker. Stephen Dorrell, Financial Secretary to the Treasury, told the Confederation of British Industry: 'Sectoral distinctions of this kind build in distortions which do not necessarily promote the overall level of activity within the economy. The Government has an instinctive preference for facilitating capital availability, without seeking to distinguish between investment opportunities by sector.'

So across-the-board tax incentives are fine, but not special carrots tied to one donkey's nose. For the time being at least, the UK film industry's best hope is to appeal to the City of London's investment community.

However, just now the City is going through one of its periodic bouts of agonising over short-termism - the accusation that banks and big institutional investors like insurance companies, pension funds and unit trusts insist on being paid back too quickly, denying worthy schemes that take longer to blossom.

George Simpson, chairman of the Rover car group and deputy chairman of Rover's parent, British Aerospace, reportedly claimed last week that he was rebuffed in attempts to keep the car firm British before agreeing to the takeover by BMW of Germany.

At the other end of the commercial scale, Mr Dorrell told the CBI 'there is some evidence that it is difficult to raise significant amounts of capital for high-tech start-ups in Britain'.

No one doubts that short-termism exists. Ask Greg Dyke, until recently chief executive of the highly successful LWT (Holdings), parent of London Weekend Television.

He bitterly blames Carol Galley, joint deputy chairman of Mercury Asset Management, saying that in effect she handed control of his company to Granada Group when she committed MAM's 14 per cent stake in LWT to the hostile bidder.

But last Thursday, Anthony Fry, a director of NM Rothschild, tried to turn the blame for short-termism away from banks and fund managers and on to private shareholders and pension fund trustees.

He said: 'To debunk a myth, most small shareholders are notorious not for their long- termism but for their short time horizons . . . Companies want, indeed need, to be judged on long-term performance; yet often their own pension fund trustees encourage short time horizons in their own fund managers.'

As was to be expected, Mr Fry's view of trustees was robustly challenged by the chairman of the investment committee at the National Association of Pension Funds, Geoffrey Lindey of JP Morgan.

Mr Lindey retorted: 'That's a nonsensical suggestion. The real return on capital of UK pension funds has been higher than in any other Western country. The long-term strategic bias of these funds has been to the long-term benefit of industry.'

He denied it was any longer true that trustees judged their fund managers on the basis of quarterly or half-yearly performance.

In fact, trustees and fund managers tend to be more pragmatic than either Mr Fry or Mr Lindey imply. Some spend large sums of money on constructing complicated mathematical risk- management models that will tell them what sort of investment portfolio will give their pensioners or policyholders the returns they need to keep them in their old age.

That can mean taking a quick profit from an underpriced privatisation issue, or sinking money into a large project such as Eurotunnel when it was floated in 1987. That has not produced a penny of dividend, and is not likely to do so until the next century.

But, however impersonal the modellers try to make it, investment comes down to gut feeling. Paul Brooks is managing director of Prudential Venture Managers, part of Prudential Corporation, Britain's biggest investor. He declared: 'If in our judgement the commercial returns on offer are commensurate with the risk, we will invest.'

The Pru is still smarting from its unhappy investment in the films of the legendary 1930s director Alexander Korda.

One of the conundrums in the current investment scene is the obvious reluctance to invest in film as cash is poured into biotechnology shares. Both industries are speculative. Both have a large creative element. Yet one is starved of money while the other is fed like the fatted calf.

A recent survey conducted by the BioIndustry Association and the accountancy firm Arthur Andersen showed that pounds 900m of equity has found a home in biotechnology companies, and the sector is looking for another pounds 1.1bn over the next three years.

Mr Brooks said: 'Investors clearly are seeing the right mix of risk and potential return in biotechnology, which they are not seeing in film - where the experience has been awful.' While that shows the City is capable of the long-term view, it still begs the question of why one is favoured over the other.

Last December, the Pru bought a 10.3 per cent stake in Celltech Group, which had accumulated trading losses of pounds 45.7m up to last September and expected to incur losses for 'at least the next three years as it develops existing and future products and undertakes preclinical and clinical studies', according to the prospectus.

'It is not a blind investment,' insisted Mr Brooks. 'It is based on hope.'

But he put his finger on one seemingly crucial difference between films and drugs: a pharmaceutical research project can be understood and assessed while it is progressing, but no matter how good its pedigree no one knows whether a film will succeed until the cinema doors open.

However, with sufficient determination that problem could be overcome in one of two ways. One is the scattergun approach - forming a fund to invest in a range of films in the hope that one or two will hit the jackpot.

Rothschild already has one of these for young health companies, Biotechnology Investments, and is about to float another. Why not do the same for films?

The other solution is to come up with packages that contain safeguards against the most extreme risk.

Although Rank Organisation pulled out of direct film production in 1979, it still has a pounds 66m film investment fund.

'We contribute to production through Rank Film Distributors,' explained Rodney Rycroft, the company's press officer. 'But we tend not to invest in more than about 30 per cent of the total cost and we may also get the rights to have the film made at our studios at Pinewood, to process the film at our laboratories, and to distribute it in various parts of the world outside the US.'

(Photographs omitted)