HAPPY ENDING: The Hobbit will be made in New Zealand, Prime Minister John Key has announced.

The Hobbit will be made in New Zealand, Prime Minister John Key has announced.

He said at a press conference this evening that new labour laws would be introduced to Parliament tomorrow to support this. It will apply only to the film industry.

Mr Key also announced The Hobbit will get a $20million ($15m US) tax rebate - US$7.5m per film - and said he would be surprised if the films were the last to be made by Warners in New Zealand.

MARK TAYLOR/Waikato Times HELEN KELLY: The CTU leader says the Government appeared poised to change the test for all workers.

The Government will also offset U$10m of Warner Brothers' marketing costs. In exchange Warner Brothers will work with the government to promote New Zealand as a film production and tourism destination.

Marketing from the movies will be worth ''tens of millions'' to New Zealand, Mr Key said.

The future of the $670 million production hung in the balance after an actors union issued a no-work order on the films last month.

Talks were held overnight with studio executives from Warner Brothers to resolve concerns about industrial laws in New Zealand.

But the studio was also holding out for a bigger tax subsidy from the Government.

The film's executive producer Sir Peter Jackson would "be a very happy camper" Mr Key said at the announcement.

The movie will premiere in New Zealand and the Government would plan a major campaign promoting the country to coincide with its launch, Mr Key said.

"It's good to have the uncertainty over, and to have everyone now full steam ahead on this project."

He said he thought the Government had got the package right. A memorandum of understanding with Warner Brothers was signed at around 7pm tonight.

It was "unacceptable" to the New Zealand public to have the film go offshore, he said.

He believed the new legislation would not take rights off workers.

Without those changes to the law it was a no go, Mr Key said.

"I am delighted we have achieved this result," Mr key said.

It will safeguard work for thousands and "put New Zealand on the world stage".

National already have the backing of the ACT party and United Future for the legislation and are talking to the Maori party. They will also discuss the changes with Labour, he said.

Mr Key was returning to his office to call Sir Peter Jackson. He had not spoken to him since yesterday morning.

EARLIER TODAY

Mr Key earlier said overnight talks with executives from the US studio had gone a long way towards resolving concerns about industrial laws in New Zealand.

Negotiation came down to how much the Government was prepared to subsidise the producers.

But Mr Key said there was still a huge gulf between Warner Bros' demands for a bigger taxpayer subsidy and what the Government was willing to pay.

"I think it's fair to say on the financial side there's a fair bit of hardball being played on both sides.

"We have the capacity to move a little bit, but we don't have the capacity to write out cheques that we can't afford to cash."

He said if it was "just a matter of dollars and cents" the Government was not prepared to bridge the gap between what other countries offered and the 15 per cent tax breaks available here.

He said Warner Bros was asking for "lots" and the Government was offering "not lots".

However, things were looking more promising on the industrial law front.

"We got some good advice overnight and I think that's an area which is looking increasingly more likely that we can reach agreement. There's a greater degree of confidence. That's looking more optimistic, but on the financial side of things at the moment, it's looking pretty difficult."

He said the difference over financial incentives meant he was still only 50-50 confident the films would be made here.

He signalled that the Government was almost sure to change the law to clarify when someone was a contractor and when they were an employee, but would not say whether it would apply just to the two Hobbit films, the film sector in general or all workers.

He rejected claims from Council of Trade Unions president Helen Kelly that the Government was using Warner Bros' threat to move the movies offshore to change the law.

Ms Kelly said the Government appeared poised to change the law for all workers and doing so at Warner Bros' request would be a serious challenge to New Zealand's ''concept of sovereignty''.

She also questioned whether Warner Bros had actually demanded the change, and suggested the Government was using the threat of the films being moved to drive it through.

''This is another attack on fairness at work. It's another attack on working people. It can be added to the pile of things going through the Parliament,'' she told Radio New Zealand.

''It's unjustified. It's opportunistic of the Government to chuck this in as a result of this dispute.

''I want to know whether this is Warners genuinely calling for this law change or ... whether there are other people behind it or whether this is simply the Government over-egging the custard on this and saying 'while we're here, we'll get some more law changes through'. We know they're keen to reduce worker rights - they've shown that. Either way it's unacceptable. It's an unfair law change.''

She said the industrial dispute that saw a union boycott of the films - since lifted - related to actors wanting to bargain collectively, not them challenging their status as contractors.

Mr Key said Warners concerns centred on a Supreme Court ruling that found a model maker at company Three Foot Six Ltd was an employee, despite his employment agreement referring to him repeatedly as being a contractor.

Employment law changes made by Labour in 2000 changed the test for determining someone's employment status so that courts focused on the nature of the relationship rather than the wording in the agreement.

Contractors cannot take claims for unjustified dismissal and do not have many of the other employment rights granted to employees.

BLACKLIST DECISION

Meanwhile, Sir Peter Jackson today released a letter which he said proved the actors' unions had already decided to blacklist The Hobbit before requesting a conversation with him.

The letter, from The International Federation of Actors, was sent to the US directors of production company 3 Foot 7 Ltd on August 17, warning that the federation had instructed its members no to act in the film until the producers had entered into bargaining with the union.

Sir Peter said that letter was the first time he had been made aware of the issue.

"It was the first time a meeting was ever requested and it was clear from the letter they had already voted to blacklist us, before even asking for one conversation with me," he said.

"I am sick and tired of hearing [union NZ Actors] Equity say 'All we ever wanted was a meeting', because it's disingenuous. They fail to add that from the outset, they had a gun to our head."

"It just made me incredibly angry, I wondered how can a union behave like this? How could Simon Whipp [Australian union representative from the Media, Entertainment & Artists' Alliance, or MEAA] initiate an international strike action against our film with no prior vote from the Kiwi membership?"

Sir Peter said he decided to release the letter after NZ Actors Equity circulated an email to its members yesterday saying all it sought was to "meet with the production and discuss the conditions under which performers would be engaged".

"It amazes me that the executive officer of NZ Actor's Equity can walk roughshod over our industry and the union itself fails to adhere to the most basic principles of democratic process," he said.

"NZ Equity has given Simon Whipp absolute power and no one seems to care if he abuses it. He can threaten the livelihoods of thousands of Kiwis, jeopardise a huge financial investment to this country and he's not held accountable. It's unbelievable."

- with TRACY WATKINS, MARTIN KAY and ANDREA VANCE, KIRSTY JOHNSTON/Stuff