Brazil is very likely to choose France's Rafale fighter jet to refurbish its air force, government sources say, a decision that would award one of the emerging-market world's most coveted defence contracts to a jet whose future was in doubt only two weeks ago.
President Dilma Rousseff and her top advisers believe that Dassault Aviation's
Rousseff previously had concerns about the Rafale because the jet had not found any buyers outside France. That raised doubts about whether Dassault would have the scale necessary to build the jets at a reasonable cost and maintain them over time.
The sources said those concerns were assuaged when India announced on January 31 that it had entered exclusive talks to buy 126 Rafales. Brazilian Defence Minister Celso Amorim travelled to New Delhi last week to discuss the deal with Indian officials and examine documents related to Dassault's bid.
The India deal changed everything, one of the Brazilian sources said. With India's decision, it's now very likely the Rafale will be the winner here.
Shares in Dassault Aviation were up 4.1 percent, at 703 euros ($930.0), in Paris during morning trading. A spokesman for the company declined comment.
The other two bidders in the competition are Boeing
Boeing said it was still in the race.
I think it's a bit back and forth right now and it's still an up-in-the-air campaign, Jeff Kohler, a vice president of Boeing's business development division, said on the sidelines of the Singapore Airshow. We are putting our best foot forward and I am sure the other companies are too.
Rousseff has cast the deal as a watershed decision that will help mould Brazil's military and strategic alliances for the next few decades as it continues to establish itself as a leading economic power.
The contract will have an initial value of about $4 billion, but will likely be worth considerably more over time once maintenance and follow-on orders are included.
Boeing said Amorim's visit to India may have put the French fighter in pole position, but that did not mean the F-18 Super Hornet was out of contention.
Going forward, the U.S. government has been very pro-actively supporting the Super Hornet in Brazil and I would anticipate as we see upcoming bilaterals in the United Sates with President Rousseff coming this way, you will have the same level of discussion in terms of the Super Hornet, said Mark Kronenberg, also a vice president of Boeing's international business development division.
The sources in Brazil said Dassault offered the best combination of a high-quality aircraft and the sharing of proprietary technology that Amorim has said is critical to the deal. Brazil hopes to use that technology to expand its own budding defence industry, led by aircraft maker Embraer
Dassault touts the Rafale as an agile, medium-sized aircraft with low operating costs that can be more quickly deployed than its bulkier competitors. Those attributes may appeal to Brazil, which has no significant problems with its neighbours and plans to use the aircraft mainly for defensive purposes such as patrolling its recently discovered offshore oil fields.
Boeing's offer of technology has yet to be finalized, but the sources said they believe it cannot compete with Dassault's bid because the United States has historically placed tight restrictions on the sale of military technology abroad.
If confirmed, the deals would enhance France's partnerships with Brazil and India, two of the world's biggest up-and-coming economic powers. They could also provide a boost to French President Nicolas Sarkozy, who has cast himself as a champion of French industry and an energetic salesman of the Rafale in particular as he faces a tough re-election fight this year.
The sources said that unexpected developments, especially a breakdown in India's talks with Dassault, could still cause Rousseff to change her mind.
They also said her decision would probably not be announced until after France's April-May election, in an attempt to keep the deal from becoming overly politicized.
MEMORIES OF U.S. TENSIONS
Brazil's air force contract is one of several deals in developing countries that have been highly contested by European and U.S. defence companies as their home markets suffer due to budget cuts. Companies are also competing for jet contracts in the United Arab Emirates, Qatar and South Korea.
Brazil's bidding process has gone through several ups and downs over the years. Rousseff's predecessor, Luiz Inacio Lula da Silva, said in 2009 that Brazil would choose the Rafale. However, he left office without finalizing the deal.
Rousseff was extremely close to Lula as his chief of staff, but upon becoming president in January 2011 she surprised her cabinet ministers by asking them to re-evaluate the bids from scratch. A month later, Rousseff told visiting U.S. Treasury Secretary Timothy Geithner that Boeing's F-18 was the best jet among the three finalists, but she still wanted better terms on the technology transfers.
The F-18 is widely believed to be cheaper than the Rafale. Boeing recently confirmed that it will offer the F-18 to Brazil at the same per-unit price as during the last round of bidding in 2009.
Ultimately, though, Rousseff grew frustrated by what she perceived as Boeing's inability to improve the guarantees on the transfers, the officials said. Rousseff is a moderate leftist who has built her presidency around policies she believes will help Brazilian industries in areas from oil exploration to auto production.
The officials said that Rousseff was also wary of a 2006 incident in which the United States blocked the sale of Embraer's Super Tucano military aircraft to Venezuela's leftist government. Washington had the power to veto the deal because Embraer's planes contained U.S. technology.
In a separate incident in 2009, Embraer said it was temporarily blocked from selling commercial jets to Venezuela because they contained U.S. communications systems.
The episodes raised doubts about whether Brazil would face similar restrictions in the future with the technology it received from Boeing as part of the F-18 bid.
Nobody's ever forgotten what happened with Venezuela, one official said.
Brazil's point-man in the confrontation with the United States in both Embraer incidents was Amorim. He was Lula's foreign minister at the time and Rousseff appointed him as her defence minister in August.
Despite her misgivings on Boeing, Rousseff also did not want to choose a jet that might not even be in production a decade into the future. In December, French Defence Minister Gerard Longuet warned that Dassault would stop production of the Rafale in 2021 if it did not win any export orders.
Within days of India's announcement regarding talks for the Rafale, Amorim traveled to New Delhi to gauge the bid's terms and its likelihood of proceeding as planned.
Amorim told the Times of India on Wednesday that Indian officials promised to give us some documents...such as basic rules on the tender process that we could compare to ours.
Brazil is not the only country that appears to be suddenly following India's lead. French newspaper La Tribune reported on February 2 that Dassault could soon seal a sale of at least 60 Rafale fighter jets to the United Arab Emirates, turning around a deal that also appeared to be a lost cause.
($1 = 0.7582 euros)
(Additional reporting by Raju Gopalakrishnan in Singapore and Cyril Altmeyer in Paris; Editing by Matt Driskill and Jon Loades-Carter)