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21 Oct 03. Dow Jones News reported that Lieutenant Brigadier Luiz Carlos Bueno of the Brazilian Air Force couldn’t have been more explicit. Talking about the awarding of a $778 million government military contract later this year to buy 12 new fighter jets, the 63-year-old officer said the decision would be “political.”

The comment, published exclusively in this week’s edition of local magazine Istoe and confirmed by the Ministry of Defense, sends a clear signal the government will likely favor its own and assign the contract to Empresa Brasileira de Aeronautica SA, or Embraer, and its French partner Dassault Aviation SA .

The move deals a blow to rival operators in the US, Europe and Russia and comes just three weeks after the government relaunched the tender process to help upgrade its air force and better police its border against drugs, arms and logs smuggling. President Luiz Inacio Lula da Silva delayed the program earlier this year, saying the government would instead focus on fighting hunger. A formal announcement naming the winner is now expected before Dec. 15.

“Technically, the planes are very much alike,” the brigadier was quoted as saying. “For the Brazilian Air Force, any one of them (planes on offer) would be interesting, but this will be a political decision,” he added. Bueno is travelling and wasn’t available for further comment.Industry participants had always expected the final announcement to be politically influenced but none predicted the government would be so direct in its message.

This will disappoint U.K. and Swedish aerospace groups BAE Systems PLC and Saab AB, which were tipped to win the process last year before it was postponed. Others hoping to win the contract include Lockheed Martin Corp. (NYSE:LMT – News), Russian Aircraft Corp., Sukhoi and Brazilian partner Avibras Aeroespacial – Latin America’s biggest arms provider.

“Lula’s government had signaled in the past it favored Embraer,” said Carl Weaver, an analyst at Bear Stearns. “But it’s surprising they would be so explicit right now and say it’s a political decision,” he added. Awarding the contract to Embraer and its partner would help support local industry at a time when Brazil’s economy is mired in recession. Lula’s party pledged to create 10 million jobs during its four-year mandate ending 2006. However, unemployment has risen to about 13% and is at its worst level in at least two years. The deal would also help lift the government’s already strong popularity in the eyes of an electorate that is highly nationalist.

Meantime, the award of the contract to the French-Brazilian consortium would help boost Embraer’s revenue amid doubts among investors it will be able to meet this year’s already-revised delivery forecast of 110 commercial and executive jets.

Embraer, which was privatized in 1994 and continues to enjoy strong links with Brasilia as one of Brazil’s largest exporters, is also expected to gain in terms of new technology as it will work alongside Dassault on the production line, said Roberto Reis of Sudameris Brokerage in Sao Paulo. Aside from the political and corporate aspect of the deal, the Brazilian Air Force’s defense system is long-tailored to Dassault’s Mirage jets. If the cash-strapped government were to buy planes from another company, the air force would have to refit its hangars and adapt its refueling systems. Embraer and Dassault are hoping to sell Mirage 2000-5 Mk2 jets to the government. Dassault is a minority shareholder in the world’s fourth largest commercial jet maker, which only makes training attack fighters.

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