Local pics’ attendance and B.O. are sharply falling, which has stoked criticism of Brazil’s tax shelter system for film.

After an excellent performance in 2003, when local pics sold 22 million tickets, attendance dropped to 16.4 million in 2004 and is expected to fall to 10 million-12 million this year.

This year’s estimates are based on a poor first quarter, when local pics’ ticket sales decreased 43% to 2.55 million, according to marketing company Filme B.

Overall ticket sales are down in the first quarter, but at a much lower rate of 17%. Local fare’s share of total ticket sales decreased to 11%, down from 16% in the same period last year.

Analysts and government officials partly attribute this to a lack of pics with popular appeal. Paulo Sergio Almeida, president of Filme B, says Oscar nominee Bruno Barreto (“Four Days in September”) was the only notable helmer with a release in the first quarter. Barreto’s “Romeo and Juliet Get Married” will sell about 1 million tickets, Almeida estimates.

Top local talent is either working abroad, such as Walter Salles and Fernando Meirelles, or making TV shows, like Hector Babenco and Guel Arraes. Prominent helmer Carlos Diegues is working on a feature to be released next year.

Sergio Sa Leitao, assistant at the Ministry of Culture, agrees on the dearth of big titles, but also points to an increase in ticket prices. The average ticket price reached 7.43 reais ($2.85) in the first half of this year, up 8% from the same period in 2004.

“Brazilian consumers are very price sensitive,” says Sa Leitao. “If ticket prices are up, the consumer goes fewer times to the movies and they usually drop local films, (opting for) Hollywood films that get much more promotion.”

While most agree the local industry needs protection to survive Hollywood’s dominance, Brazil’s decentralized tax shelter model has been heavily criticized.

During the existence of film agency Embrafilme, shuttered in 1990, the government made direct investment in productions that fit a central market strategy. Under the existing system, companies are free to earmark a portion of their income tax to any pic project. The positive aspect is that the government has less control. But the indirect investment system leads to imbalance, with certain seasons loaded with blockbusters while other periods lack strong pics.

“Even within the existing system, I believe the government could do more in leading the sector,” says Almeida.

Sa Leitao says the government is actually willing to reform the shelter system. He adds that Brazil has launched two programs that will eventually have a positive impact on the film sector:

The Audiovisual Industry Fund (Funcine) program, announced in November 2003, allows companies to invest up to 3% of their tax liability toward production and exhibition. If the projects are profitable, the investor company shares in the wealth.

The other program is a credit line of government bank BNDES with lower interest rates and special conditions for the construction and renovation of theaters and the purchase of exhib equipment. It was announced in November, but exhibitors have so far not taken advantage of it, due to BNDES’ high collateral demands.