A call for action to European, national and regional decision makers to invest in cultural SMEs and boost Europe’s economy while looking to industry peers to reward investment in new talent and compensate for imbalances in the sector.

This Action Plan constitutes a new financial blue print for culture. Europe’s leaders recognise the potential of SMEs and the need for special support measures . IMPALA calls on decision makers to empower cultural SMEs . A key issue for SMEs is access to finance as well as how the industry itself organises its finances.

We recommend a range of regional, national and EC investment measures to promote the economic, social and cultural revival of Europe .  IMPALA also calls on colleagues in the music industry to reduce the gap between the big and the small in the sector. Revenue-sharing mechanisms and sport style measures to reward talent development by small labels are recommended.

The plan is inspired by other sectors with parallels to music, such as football and other sports, and of course film. Innovation and R&D sectors are also inspirations. Excellent investment schemes exist at national and EC level for many of these sectors, and IMPALA is asking governments to open these up to include music and other innovative cultural industries. IMPALA’s plan also calls for a moratorium on VAT online and new accounting standards to value copyright properly.

IMPALA calls for a 10-point financial tool kit with:

  • 5% compensation fee on all future revenues of artists developed at a smaller label and later signed by a major .
  • Revenue sharing system where a percentage of revenues is re-allocated within the sector on a solidarity basis to fund new music and help SMEs compete .
  • New international accounting standards to ensure proper valuation of copyright as an intangible asset .
  • Zero VAT rate for culture online to match the USA, and allow governments to boost access to culture by reducing VAT rates for culture offline.
  • 1.5bn euros EC investment for culture per annum with new cultural industry EC programme especially for SMEs .
  • “Virtual creative industries bank” by remoulding EIB/EIF instruments, in particular to provide support through the digital shift .
  • At least one public/private option for cultural SMEs to get their loans guaranteed in each country .
  • National and regional SME-friendly growth finance to be delivered by opening up R&D and other tax and investment schemes to music and cultural industries and by adopting specific incentives such as music tax credits .
  • Pan-European experts working group to bridge the gap between investors and cultural SMEs in terms of communication and expertise .
  • EC intervention to resolve double taxation and withholding tax problems .

Europe’s leaders officially recognise that cultural and creative SMEs are the drivers of “growth, job creation and innovation” in Europe. The same leaders also acknowledge that these SMEs need specific support measures. (Conclusions of the main EC Council (meetings between the Heads of State of all EC members), as well as Culture Council, of March, May and December 2007). Today this is more true than ever. We now also have new evidence of the power of cultural SMEs outside their own sector. The EC’s recent study on Culture and Creativity found that culture based creativity (as opposed to technological based creativity) makes Europe a more creative and innovative place generally – a valuable multiplier effect from investment in the cultural industries.

The EC’s Green Paper on cultural industries is expected to set out priorities to unlock the potential of Europe’s cultural industries, in particular SMEs. This IMPALA Action Plan identifies the concrete financial measures required. Other measures are also necessary.  IMPALA’s experience shows that SMEs can only deliver their potential if three key conditions are met: i) financial viability and independence; ii) market access to give SMEs space to compete on their own merits and counter chronic concentration; iii) properly functioning copyright systems and digital market in Europe. In her former role as Competition Commissioner, Neelie Kroes recognised that preferential treatment for SMEs is fully justifiable “economically and politically”. She acknowledged, “… we must give SMEs an extra boost to help them overcome the gaps” (speech on SMEs, November 2007). In culture, SMEs make a disproportionate contribution (80% of all new releases in music are from independents).  New competition guidelines are another support measure needed to set out an approach which is better adapted to the cultural and creative sectors with respect to cultural economics, mergers, merger remedies, state aid, dominance and anti-competitive agreements.

The French Creation and Internet Report (adopted in January 2010) underlines that financing creation is fundamental, particularly in the digital era. The report also includes a whole package of measures to grow the digital market, increase diversity, guarantee market access for SMEs and ensure that innovation is financed properly. At EU level, the Small Business Act adopted last year called on Europe to “think small first” because SMEs are our backbone, providing 80% of Europe’s jobs. The SBA highlighted the problem of finance for SMEs, stating: “the EU and Member States should facilitate SMEs’ access to finance, in particular to risk capital, micro-credit and mezzanine finance and develop a legal and business environment supportive to timely payment in commercial transactions”.

The new Lisbon partnership prioritises the environment as well as employment, innovation and the digital agenda. The additional advantage of investing in cultural SMEs is that this is a naturally low carbon economy sector. It would also implement the UNESCO Convention on cultural diversity, securing one of the fundamental principles of the convention - fair and equitable access for all actors to the means of creation, production and distribution of cultural expressions.

A compensation system exists in other industries to recognise and support the importance of the investment by smaller players in new talent. For example in football, there is the classic transfer fee system and a “solidarity mechanism” whereby the club(s) that helped train young players receive 5% of future transfer fees. We do not recommend that music’s finances be run in the same way as some of those, say, in the Premier League. Such a measure in music would not be enough on its own to put the small on a level playing field with the big. In football these measures are not enough either. However it would establish a formal system whereby the industry agrees that investment in talent development must be properly rewarded by the big labels who benefit from such creativity.

In music we would suggest the revenue sharing percentage is re-allocated not in proportion to earnings but in proportion to the number of releases registered, or other criteria, e.g. similar to those used to allocate the French cinema tax or live music tax to encourage new production, or in certain sports leagues to encourage investment and solidarity. Examples of this can be seen in France where 10.72% of cinema tickets and 3.5% of concert tickets goes to national bodies which fund further creation. It can also be seen in the English Premier League, which distributes TV rights monies (50% equally, 25% based on TV appearances, 25% based on league position (the EC says that competition concerns regarding the exploitation of TV rights due to dominance by big clubs can be resolved where the distribution mechanism creates more solidarity)).  In France 75% is shared equally among all clubs.  In order to enhance competition in US baseball, the wealthiest teams put money in to a pot for distribution to less successful teams and the US National Hockey league shares ticket revenues between all clubs.

Intangible assets are not generally capitalised in the balance sheet. If they can be properly valued, banks have more elements to guarantee their assessment of the financial situation of cultural SMEs. We need concrete solutions to increase investors’ confidence in cultural SMEs.

Culture contributes 2.6% of the EU’s GDP (bigger than chemicals, automobiles or ICT manufacturing) but receives less than 0.05% of the EU’s budget (862.3b€, 2007 to 2013, with 400m€ for cultural programmes which do not even support the industry). This is not a balanced investment in culture. In 2008 the total EU budget was 129.1b€, of which 58b€ was spent on competitiveness, knowledge based economy and social cohesion. 2.6% of that budget would be 1.5b€ per annum. The latest figures (TERA – Building a digital economy, published in March 2010) actually put the core creative industries contribution to European GDP at 4.5% increasing to 6.9% when including non-core cultural industries.

Regrouping EU schemes is essential, including culture, research, structural and innovation funds. In addition, structural support measures through regional funds should target cultural SMEs to grow and develop sustainable activity. An EC programme on cultural industries should encompass a series of support measures focusing on A&R (the research and development part of the cultural sector), production, promotion and distribution. We need to end EC discrimination between film and other cultural industries, in terms of funding and other regulatory measures.

Europe’s digital market is struggling to take off.  SMEs need focussed support to help them invest in the digital shift and continue to take new risks and innovate in terms of their cultural output.  Current EIB/EIF funds are in effect not accessible by the SMEs who need them most.

There are financial tools established at national level that could be disseminated amongst other member states such as the scheme used by IFCIC in France, Cultuurinvest in Belgium and ICO in Spain. These mechanisms improve the viability and independence of cultural SMEs.

The French tax credit system is a fantastic example of how fiscal mechanisms can be used to increase investment in talent.  We encourage all member states to adopt a similar approach and/or open up schemes for innovation and R&D etc.  It is important that these incentives focus on SMEs. In music, 99% of all operators are SMEs and micro-actors, producing over 80% of all new releases. SMEs are the norm, not the exception and the EC needs to legislate for them first, with exceptions for the bigger players. Concentration in cultural markets creates severe market access problems. For example, in music, four companies create less than 20% of the music produced in Europe today, yet control over 95% of Europe’s hits and main airwaves. Furthermore, the gap between the majors and the independents means the majors are able to leverage their power and squeeze the independents’ space more and more. The biggest major now controls over 50% of the world’s music while only a handful of the biggest independents have more than 1% and only one has 1.5%. Appropriate SME friendly growth finance is absolutely essential.

The lack of expertise on the characteristics of cultural SMEs creates a gap between proposed EU policy initiatives and the functioning of the cultural sector. Operational schemes have to bridge the gap between the funds available and the needs of cultural SMEs. The working group should bring together professionals from the cultural industries, the finance sector and the EC to recommend concrete practices, change the ‘high-risk’ perception of the cultural sector and build consortia to access funds where intermediaries are required, eg with the European Bank.

Withholding tax and double taxation are examples of trade barriers which need to be abolished as part of cutting red tape for SMEs in Europe. Lowering the fiscal burden for small cultural actors would be an incentive to investment in culture. This is also a priority of the SBA (see above).

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