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IMPLICATIONS OF BUDGET CUTS FOR THE BRAZILIAN DEFENCE SECTOR

Brazil

28 May 15. The Brazilian government has announced its budget for 2015, which will see a cut in defence spending. The total defence budget for FY2015 is BRL17.03bn (USD5.39bn) which is a 25 per cent reduction since the FY2014 budget. The government explained that this reduction is due to the country’s fiscal difficulties and the importance of prioritising economic stability. Overall federal government spending is to be cut by BRL69.9bn (USD22.12bn).

The defence ministry’s consideration of austerity measures casts a shadow of doubt on procurement, training and deployments in an optimal way to best use the limited budget. The most immediate implication would likely be a reduction in overseas troop deployments.

The Brazilian financial year runs from January to December. Contingency planning will be especially important over the coming months because, in order to introduce a project under next year’s budget, all preparations including industrial engagement must be completed by August or

September 2015.

This article takes a look at some of the key announcements made so far and examines how they could affect ongoing and planned procurement programmes, Olympics security, and, most importantly, the SISFRON programmes. It is likely that there will be some delays and suspensions in current procurement plans.

Procurement programmes:

Around this time last year, then Defence Minister Celso Amorim was hopeful that the budget allocation for defence would rise from the current 1.5 per cent of GDP to 2.5 per cent in the next 8 to 12 years, in order to maintain pace with modernisation efforts in line with other BRICS countries. For the best part of 2014 and until now in

2015, Brazil’s modernisation plans were made in line with the hope that spending increases over the coming years could fuel the required defence procurement programmes.

Despite the hopeful confidence expressed by government officials about optimising procurement programmes, fiscal realities indicate that Brazil is likely going to have to prepare for some setbacks. The defence ministry said last week that it will prioritise modernisation projects that have already been committed to and will manage them effectively to reduce costs. Defence Minister Jacques Wagner has said, “Our strategic projects must not suffer any discontinuity”. One of the areas that Minister Wagner has not addressed is how Brazilian defence companies responsible for delivering strategic programmes will be affected by the proposed tax changes.

In addition to a possible reduction in orders due to budget cuts, proposed changes to tax levels may affect the performance of local defence industries involved in strategic projects. Most of the strategic programmes are being developed through industrial collaboration between Brazilian companies and international companies and governments. In order to reduce the deficit, the Brazilian senate is considering a measure to raise tax on financial institutions’ profits from 15 to 20 per cent. The tax hike would go into effect in September of this year, and through it the federal government expects to collect USD241 m by the end of 2015 and USD1.2bn in 2016. The minister in charge of the Strategic Affairs Secretariat (SAE) of the Presidency, Roberto Mangabeira

Unger, has warned that this would affect the abilities of companies to access credit, access advanced technologies, and ultimately their ability to develop and deliver hightech projects in large scale. He has cited the development of the Gripen NG, in partnership with the

Swedish company Saab, and the construction of a nuclear-powered submarine as important strategic programmes which, if affected, may fail to act as catalysts for an entire production chain. Announcements from 13 May indicate that the Army is on track with its strategic project OCOP

(Achieving Full Operational Capacity), which will be rolled out from 2023 and aims to transform operational units across the country.

New budget cuts could also mean the delivery of 50 Helibras helicopters may be pushed back to 2019 from the current estimated delivery in

  1. 15 of the EC-725 aircraft have already been delivered as part of the EUR1.9bn (USD2.08bn) contract signed in 2008. Implications for SISFRON: The Army has been quick to point out that one of the key projects – the development of an integrated border monitoring system (SISFRON) – could face delays. There were some planned procurements as part of SISFRON scheduled for 2015 in preparation for the roll-out of the second phase in 2016, but delays are anticipated to this schedule.

The SISFRON project is currently going to enter the test phase at its pilot system at the 4th Brigade Mechanized Cavalry, Dourados. The pilot system includes 3 layers: the first is the sensing and decision support, comprising everywhere command devices and control fixed and mobile radars, sensors, data reading software. The second layer supports the operation and corresponds to individual soldier equipment, vehicles, and vessels.

The third layer is engineering works, including the construction of physical facilities as a garage for vehicles and accommodation.

While the sensors and C4I systems will begin to be tested in

June, there were also procurements planned as part of the second layer in 2015. For example, planning for 2015 included commencing the bidding process for the acquisition of remotely piloted aircraft systems

(RPAS) that will be used for the monitoring of areas where the sensors will be installed. Following the start of testing in June, Brazil intended to plan the second phase that was to be implemented in 2016 in the north and south of the country. Planned procurements for the second phase were to begin in 2015, including the purchase of light vehicles, cranes, patrol boats and individual solider equipment.

Olympics:

There have been reports of possible cost inflations in the Olympics preparation works. There has been no explanation from the government nor any contingency planning announced as part of the budget as to how these costs will be met. Reuters reported on 8 May, “With less than 500 days until Rio de Janeiro hosts the Olympic Games, construction of several venues has not started and some major contracts have not even been tendered, setting the stage for a last-minute rush that will likely drive up costs.” In terms of defence spending, the 2016 Rio Olympics will see an investment of BRL200m (USD63.52m) this year and BRL106m (USD33.66m) in 2016. The total defence spending to support the Olympics was BRL580m (USD184.14m) of which BRL274m (USD86.99) has already been spent on infrastructure, training, and equipment. Brazil expects to deploy about 37,000 military personnel across the six host cities of the Olympics competitions.

While construction tenders have suffered from corruption scandals, security contracts have also seen some criticism along with alleged cancellations for political reasons. Brazil has announced the exclusion of an unnamed security company from working at the Olympics following a campaign by Palestine solidarity activists. Media reports speculate that this refers to the Israeli firm International Security and Defence Systems (ISDS), which was thought to have won a USD2.2bn contract in October 2014 to coordinate security at Rio. But last month, a division dealing with large events at Brazil’s justice ministry denied that ISDS had been awarded any contract. Activists and protesters are now targeting the Olympics Committee, which has named ISDS as an “official supplier” for the games.

 

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