Massive government handouts to lure overseas film companies to New Zealand may turn the local film industry into a "mere service industry", say film-makers.

The Government announced yesterday that film or television productions which spent more than $50 million in New Zealand would qualify for a 12.5 per cent "production expenditure grant" which would be tax-exempt.

The Government has set aside $40 million for the scheme in the first year, but some in the industry anticipate the end bill could be much bigger.

Projects costing between $15m and $50m would also be eligible where this equated to at least 70 per cent of total production spending.

South Pacific Films CEO John Barnett welcomed the Government's turnaround, saying "continuity" was important in attracting off-shore productions.

"It's a move that matches us up with a number of other territories," he told NZPA today.

"But my reservations are that when a similar scheme was introduced in Australia, there was also a patch given to local industry to ensure it wasn't swamped by foreign production.

"Although this is mentioned in (Economic Development Minister) Jim Anderton's press release, the form of it isn't there yet and I'd be very keen to be sure that it is going to be instituted otherwise we run the risk of becoming a service industry as opposed to creative industry.

"The Government is very keen on a knowledge economy but the mere serving of pictures (providing crew and lights and moving equipment around) doesn't necessarily create a knowledge economy."

Big-budget off-shore productions which paid considerably more would end up pricing local film industry workers out of the local market, he said.

Very few New Zealand films would actually qualify for subsidies.

"There are maybe three New Zealand films in the wings in that bracket."

Internationally recognised Wellington film-maker Gaylene Preston said the central problem was "the focus on foreign money".

In the year to June, there had been only two New Zealand feature films made, one of which was her own film, Perfect Strangers, completed just three days ago.

"So all the rest of the feature film activity in New Zealand was foreign-funded.

"If you want to tell a New Zealand story, the bottom line remains that have to leave New Zealand and get substantial international involvement in your idea, and I think that excludes a lot of New Zealand stories."

While the Government would argue that local filmmakers could apply to the Film Fund, Preston said the one-off $20 million fund was already "fully committed on paper", with nine films planned over the next two years.

Since the fund was set up in 1999, it has funded just two films: Whale Rider and Perfect Strangers.

"There are 20 experienced film producers in New Zealand who wake up every morning and all they're trying to do is make the next feature film, and try and put a deal together that will fit Film Fund criteria," she said.

Most New Zealand films were made on tight budgets of between $2 million and $15 million.

Taking the $15 million ceiling off the tax breaks would "be a big help" to local film makers, she said.

Preston also said she believed the scheme would cost more than the Government's projections.

"They haven't reckoned on how many films will come here, but it's going to cost more than $40 million.

"Something needed to be done, so good on them for doing something, but I would like to see a plan that's far more inclusive, that saw more than two local films made in a year and local film production not totally beholden to what stories foreign interests want to be told.

"If we're talking about legislation that improves the making of films in New Zealand, we've got to applaud it, but if we're talking about legislation to see more New Zealand films made, then we've got to be worried."

However, film-maker Peter Jackson, whose Lord of the Rings trilogy was initially lured to New Zealand with the help of a now-defunct tax loophole, said the Government's initiative would have huge flow-on effects for the whole economy.

"I am thrilled Jim Anderton has shown this measure of support for the NZ film industry, as we can now compete internationally for film finance on a level playing field," he said.

"This incentive allows the opportunity for New Zealand producers and directors to make larger budget films in their home country, which in turn will result in more jobs and will have obvious flow- on financial benefits for the local economy.

"The Government is to be congratulated for its continued support of New Zealand filmmakers and industry crafts people.

"With the recent success of The Lord of the Rings, Christine Jeff's film Rain and Niki Caro's Whale Rider, it's clear to everyone that we can make movies that rival the best in the world and we can now look to the future to build upon this success."

Finance Minister Michael Cullen today told reporters he had taken the paper to cabinet outlining the grant scheme.

He had bid strongly for grants instead of tax breaks, he said.