| SAO PAULO
SAO PAULO 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 defense 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 (AVMD.PA) bid to sell at least 36 Rafales offers the best terms among the three finalists, the sources told Reuters on condition of anonymity.
The other two bidders are Boeing's (BA.N) F-18 and Saab's (SAABb.ST) Gripen.
Rousseff has cast the deal as a watershed decision that will help mold 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.
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 Defense Minister Celso Amorim traveled 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."
The sources said that 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 defense industry, led by aircraft maker Embraer (EMBR3.SA).
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 neighbors 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 two of the world's biggest up-and-coming economic powers - Brazil and India. They could also provide a boost to 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 OVER JETS SALE
Brazil's air force contract is one of several deals in developing countries that have been highly contested by European and U.S. defense 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, Reuters reported on Friday.
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 defense minister in August.
Despite her misgivings regarding 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 Defense 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.
(Reporting by Brian Winter; Editing by Kieran Murray)