Brazil Market Report 29 January 2021

Report Introduction

• This report provides a review of the defense spending and procurement programs in Brazil. • The report draws heavily on Janes Brazil Market Report – Navigating the Emerging Markets series and has been tailored for NH ADEC and its membership, specifically focusing on the Brazilian Space programs as well as providing an overview of EMBRAER, Brazil’s largest aerospace company • The report is meant to guide NHADEC members with data, visualization, analysis and insights to support future business development decisions.

Executive overview Brazil has the largest armed forces, the largest defence budget and the most advanced military manufacturing industry in Latin America. However, the legacy of its military dictatorship means that civilian distrust of the armed forces only recently began to recede, allowing the country to restructure and modernise its forces to meet new challenges. The country's election of right‐wing populist Jair Bolsonaro as president in October 2018 has led to several marked shifts in Brazil's policymaking following his inauguration in January 2019.

Consecutive national defence strategies in 2008 and 2012 emphasised Brazil’s commitment to building an indigenous defence industry capable of supplying its growing military requirements. In 2012 Brazil published a USD300 billion, 20‐year equipment plan that outlined the aspirations of its military forces until the 2030s and in some cases, such as nuclear submarine capability, beyond.

A long list of procurement requirements and a desire to benefit from contracts with overseas manufacturers have made Brazil an important market for international suppliers. Since 2010 the country has signed significant strategic defence accords with states such as France, India, Italy, the UK, and the US and has shown a determination to gain the maximum value from foreign procurement through extensive offset and industrial participation.

Brazil's emergence as a significant importer of defence materiel has been reliant on its economic performance, which has markedly weakened since 2010. The country went through a recession between 2015 and 2016. Nonetheless, following successive increases in 2017 and 2018, by 2019 the military budget was 3.5% higher than in 2010. However, in May 2019 a new spending “freeze” was applied to the defence budget for the remaining period of the year. The money remains in the government’s budget but is locked down as “contingency funds” that can be spent only if the economy improves or new sources of revenue are found. This spending freeze was compounded by the advent of Covid-19, with 1.15 million cases as of mid-2020 causing significant uncertainty regards its return to the budget along with nature of additional government cuts because of a

Defense Spending

Defense Budget and % 2020 2021 2022 2023 2024 GDP

Constant 2021 USD 14.666 25.534 26.501 26.882 27.295 billion

% of GDP 1.00% 0.94% 0.94% 0.94% 0.93%

Brazil’s defence budget is largely typical for Latin America, with Personnel and Social benefits making up the vast majority of the Defence budge. However, the extent of this spending on personnel costs is high even by the standards of the region typically comprising of 75-85% of the total defence budget. Although the proportion of the defence budget dedicated to personnel costs had been on a slight downward trend since 2005, in part to increased procurement spending, the share of 2019ʼs defence budget consumed by the wage and welfare bill was the highest since at least 2005. From 71% of total spending in 2015, already high even for the region, spending on wages, welfare and pension commitments has grown in real terms every year, reaching a historic high of 81.3% of the defence budget in 2019. This declined under the 2020 defence budget, down to 71% but rose again in 2021 to 78.4%. A slow decline is forecast to begin due to the rate of inflation which should bring personnel costs in line with regional averages.

Brazil is committed to maintaining defence budget growth and has driven this with several large scale equipment procurement programmes, aiming to modernise existing capabilities and transition from a regional power into a global one. However, budgetary constraints between 2017 and 2019 have forced the delay of a number of acquisition programs planned for that period into the 2020-2023 time bracket. Despite this, Long term spending plans such as the acquisition of a new aircraft carrier and next generation aircraft are expected to drive spending in the long term.

Defense Spending Outlook Prior to Covid-19, defence spending forecast were already under significant pressure because of the restriction in the expansion of state spending to the level of inflation, as well as uncertain political commitment and pressure to direct increasingly limited public funding towards social projects such as poverty reduction.

However, the change in administration in January 2019 and use of freezing discretionary funds for government departments to achieve political aims has meant a large degree of uncertainty still surrounds Brazil’s likely defence budget allocations from 2020–2021 onwards. Further defence cuts remain a distinct possibility particularly given the rise in domestic political tensions as well as a large drop in overall state spending forced by a global recession and high deficit.

A cut in real-term defence spending of 2.72% is forecast for 2021, with a rebound of 2.87% real-term growth in 2022 should discretionary funding frozen in 2019 be unfrozen and not transferred to deal with health or economic responses related to Covid-19. Growth is expected to stagnate at just under 2% real terms until 2026, largely because of a broad-based freeze of procurement ambitions primarily focused on the Brazilian Navy and Air Force’s 2030 requirements, which state an aim to have a second naval fleet comprising two aircraft carriers, frigate escorts, and submarines.

Type of Spend 2020 2021 2022 2023 2024 Procurement 1.138 1.549 1.873 2.216 2.368 RDT&E 0.069 0.187 0.204 0.195 0.219 Military Personnel 10.497 20.008 20.347 20.113 20.031 O&M 1.279 2.523 2.933 3.158 3.432 Other 1.685 1.268 1.144 1.200 1.246 Total 14.667 25.535 26.501 26.882 27.296

Defense Spending Outlook by Category

Procurement

The number of large acquisition projects under way has exerted long-term upward pressure on Brazil’s procurement budget, with real expenditure on equipment growing from just under USD1 billion in 2005 to USD4.1 billion in 2010, before falling to USD1.4 billion in 2016. 2017’s large budget rise saw a brief recovery in the country’s acquisition budget, with USD2.3 billion allocated, but 2018 and 2019’s budgets cut funding to procurement significantly, to USD1.3 billion.

The 2020 allocation represented 7.8% of spending, up 2.8% on 2019, but this is forecast to drop by more than 1.5% because of Covid-19 budgetary pressures. Despite this, long-term programme commitments and large capabilities gaps are expected to put further pressure on defence budgets, with funding for such programmes becoming increasingly scarce as pre-Covid funding tactics of financing through savings in personnel expenditure adjust to overall budgetary pressure.

Defense Spending Outlook by Category

Research, Development, Training and Evaluation (RDT&E)

Military RDT&E is generally low in Brazil, although in 2013 R&D expenditure took up a record proportion of the budget at 2.4% of total spending, largely due to increased investment in naval nuclear reactor technology. That has since been reduced to 0.5% in 2020.

The three services’ R&D takes place at the Army Technology Centre (Centro Tecnológico do Exército: CTEx), Navy Research Institute (Instituto de Pesquisas da Marinha: IPqM) and Department of Aerospace Science and Technology (Departamento de Ciência e Tecnologia Aeroespacial: DCTA).

Defense Spending Outlook by Category

Personnel

Personnel and social benefits make up by far the largest portion of the Brazilian defence budget, despite falling markedly in real terms in the years following 2010. 2013 saw the lowest real personnel budget allocated to the armed forces for nearly a decade.

With significant drops in procurement and O&M spending in 2016, and few opportunities for further wage cost savings without sacrificing capability, personnel expenditure jumped to 77.5% of total spending in 2016. Although personnel expenditure fell slightly in proportional terms in 2017, absolute costs rose by more than USD2.2 billion in real terms.

In 2018 and 2019 further large increase in personnel spending occurred, taking it to more than 81.3% of the total budget. With budgetary pressures caused by Covid-19, personnel costs are expected to bear the brunt of defence cuts, declining from the 2019 high of 81.3% to just above 73.4% in 2024.

Defense Spending Outlook by Category

Operations and Maintenance (O&M)

A result of high personnel expenditure and robust procurement plans has been that Brazil’s O&M spending has remained proportionally one of the lowest in South America. Total O&M expenditure rose from USD2.6 billion in 2005 (or 12.3% of the budget), to USD2.6 billion (10.6%) in 2015.

However, budget cuts in 2016 drove Brazil’s O&M spend down once more to USD1.83 billion, or 8.5% of total expenditure, before shifts in spending in 2018 reduced operational spending further, to just over USD1.67 billion, where it remained for 2019. In 2020 O&M increased slightly to USD1.85 billion or 8.7% of the budget.

Defense Spending by Service

Type of Spend 2020 2021 2022 2023 2024 SUM % Army 5.726 10.467 10.918 10.914 10.891 48.917 40% Navy 3.719 7.379 7.261 7.366 7.752 33.478 28% Air Force 3.848 6,435 6.758 7.124 7.370 31.534 26% Defense Wide 1.373 1.254 1.564 1.479 1.283 6.952 6% Total 14.667 25.535 26.501 26.882 27.296 120.880

Service Specific Spending - Army

The Brazilian Army (Exército Brasileiro: EB) is undergoing an ambitious and long-term expansion and modernisation programme. The 'strategic' portfolio comprises 16 co-ordinated programmes intended to modernise the force's equipment, personnel, logistics, planning, organisation, education, doctrine, training, and more. These efforts have led to a major reorganisation of the land force and the establishment of a new territorial command structure. The army also established a new cyber and special operations commands.

In 2014 the 20216-2019 Army Strategic Plan (PEEx 2016-2019), outlined procurement and upgrade aspirations for the period. It included the transformation of motorised infantry to mechanised infantry brigades through the upgrade of the existing EE‐9 Cascavel, EE‐11 Urutu and M113 fleets and procurement of 6×6 VBTP‐MR Guarani armoured vehicles, the 4×4 VBMT‐LR armoured reconnaissance vehicle, 4×4 air‐mobile VLEGA Chivunk and the 8×8 armoured combat vehicle.

Because of budgetary constraints, some activities belonging to these projects have been moved to the next phase, PEEx: 2020–2023. Planning for that phase began with a training session in February 2019.

Type of Spend 2020 2021 2022 2023 2024 Procurement 0.278 0.293 0.306 0.327 0.338 RDT&E 0.000 0.010 0.008 0.011 0.016 Military Personnel 4.683 9.483 9.770 9.654 9.502 O&M 0.360 0.628 0.764 0.873 0.980 Other 0.405 0.052 0.071 0.049 0.054 Total 5.726 10.467 10.918 10.914 10.891

Key Programs - Army

Guarani VBTP‐MR armoured fighting vehicle (AFV) Procurement Brazil is procuring a wheeled medium armoured vehicle in the form of the VBTR-MR. The vehicles are to be delivered in troop carrier, command post, communications, ambulance, 120 mm mortar carrier, engineering, repair, anti‐aircraft, and training variants. The first Guarani vehicle was delivered to the Brazilian Army in June 2012. The vehicles will be delivered in batches of 723, 547, 275, and 35, with completion scheduled for 2035.

4×4 multipurpose vehicle VBMT‐LR Procurement Brazil plans to acquire a family of 1,200 protected 4×4 multipurpose vehicles in various configurations, closely related to the VBTP-MR program to support for border patrol, foreign operations, and homeland security missions.

M577A2 Command Posts Donation In January 2020 it was revealed the US government had donated 60 M577A2 armoured command post vehicles to the Brazilian Army. According to the plan, 30 vehicles will be delivered by July 2020 at the earliest, while the remaining 30 vehicles will arrive sometime in July 2021 or later.

UH-60M Black Hawks Procurement The Brazilian Army is considering the purchase of three Sikorsky UH‐60M Black Hawk helicopters via the US FMS programme, although no acquisition schedule has yet been set. The purchase would include twelve M134 7.62 mm electrically driven machine guns, indicating the helicopters could also be used to provide fire support for ground forces. Moreover, the number of machine guns requested may also indicate they will eventually arm the other Black Hawks the armed forces operate

Service Specific Spending - Navy

The Brazilian Navy has a modest blue‐water fleet that can undertake a range of naval tasks. This fleet includes the region’s only multipurpose helicopter carrier, three amphibious landing ships, five diesel patrol submarines, eight frigates, and a few corvettes. However, the fleet has suffered from limited availability and a substantial number of vessels are docked for repairs. Meanwhile, Brazil’s green‐water fleet includes modern offshore patrol vessels and coastal patrol vessels, but the number of vessels is insufficient given the country’s long coastline. The Brazilian Navy’s brown‐water fleet is also relatively small considering the extent of navigable rivers it is required to patrol, which run about 48,000 km. Lastly, although the Brazilian Navy’s does operate rotary- wing assets, fixed-wing maritime patrol is the responsibility of the Brazilian Air Force

The Surface Ships Acquisition Programme, has been suspended indefinitely. To mitigate the consequence of PROSUPER’s suspension, the MB launched the Tamandaré programme to build a modified version of the Barroso-class corvette. In the air domain, the Navy is procuring Helibras H225Ms anti‐surface warfare helicopters and upgrading some of its AH‐11As to AH‐11B standard. Meanwhile, procurement of four diesel‐electric submarines and one nuclear submarine is moving ahead as part of the Submarine Development Programme. In the longer term, Brazil is planning to procure two aircraft carriers, although realization of this ambition will be difficult considering financial constraints.

Type of Spend 2020 2021 2022 2023 2024 Procurement 0.359 0.553 0.693 0.744 0.775 RDT&E 0.034 0.140 0.142 0.140 0.143 Military Personnel 2.563 5.239 5.119 5.156 5.271 O&M 0.233 0.553 0.581 0.663 0.826 Other 0.531 0.893 0.726 0.663 0.736 Total 3.719 7.379 7.261 7.366 7.752

Key Programs - Navy

Scorpène Submarine Procurement The Brazilian Navy is acquiring four Scorpène type diesel-electric submarines to augment the existing Type 209 fleet. These vessels were ordered in 2009 and the first delivered in 2020. The remaining vessels are expected between 2022 and 2024, with their later delivery a result of construction being carried out domestically. Operationally, these submariens will be used to patrol territorial waters and offshore oil fields.

Nuclear Submarine Development Brazil is seeking to develop a domestically produced nuclear powered submarine. In 2008, France and Brazil would co‐operate in this program, with the hull and propulsion design being of French origin, while the nuclear power plant would be domestically sourced. While the first submarine was expected to be operational by 2025, the reduction of the defence budget affected the timeframes of the programme. This will significantly delay the entire project, postponing the initial operating capability by more than eight years.

Tamandaré‐class Corvette Procurement The Brazilian Navy is seeking to procure four Corvettes to augment its fleet, with a request for proposals being issued in 2017. The MEKO A100 design was selected in 2019, with domestic production contracts signed with Aguas Azuis in March of 2020. These new vessels will be utilised to enforce brazils exclusive economic zone, along with patrolling its offshore oil fields.

Aircraft Carrier Development Brazil plans to produce two indigenous aircraft carriers by 2030 to replace the former French Carrier Foch that has been in service since 2000 and has suffered significant availability issues. While the program initially envisioned a 2023 initial operational capability, this has been pushed back to 2030 due to financial limitations.

Service Specific Spending – Air Force

The Brazilian Air Force (FAB) is the largest military aviation service in South America. During recent years, the air force has embarked upon a programme of acquisitions and extensive modernisation processes. The current modernisation efforts seemed to sufficiently address the air force’s weaknesses, but the economic situation has not only slowed down procurement, but also negatively affected the air force's readiness with lower flying hours.

The main tasks of the FAB remains the defence of national airspace, logistical support of the other services, and support of counter-narcotic mission in the border areas. The FAB takes action against illegal overflights if any aircraft fails to respond to radio communications or if it is suspect to be transporting drugs.

A number of long‐term requirements are being fulfilled while others have been shelved or cancelled due to lack of funds or changes in government policy. The economic situation has not only slowed down procurement but has also negatively affected the FAB's readiness. At any given time, only 300 to 320 FAB aircraft are operational. Out of that total, circa 230‐250 are operating without or with few restrictions, while the rest have medium to severe restrictions.

Existing procurement and modernisation programmes focus on speed and range to improve reaction times and facilitate deployment to all parts of this vast country as well as the development of capabilities of the indigenous defence industry.

Key Programs – Air Force

Gripen Procurement Program In 2013, Brazil Announced the acquisition of 36 JAS-39 combat aircraft, comprising of 28 single seat JAS-39E aircraft and 8 JAS-39F twin seat aircraft. Production of the initial 13 aircraft will be fully conducted by Saab, while the remaining 23 would include Brazilian participation including final assembly. Saab commenced production in Brazil in 2018, with the first aircraft starting their certification in 2019. Serial production is expected to be underway by 2022, with entry into service between 2023 and 2024. Follow on procurement with the objective of replacing the entire F-5 and AMX fleets has been delayed due to financial limitations, with an additional 108 aircraft expected to be ordered between 2022 and 2035.

KC-390 Procurement Program Brazil is expected to procure 28 domestically produced medium-lift tactical transport KC-390 aircraft, with the first aircraft delivered in September of 2019. Final delivery is expected in 2026, rather than the original 2024 due to financial limitations setting back deliveries.

Embraer E-99M AEW&C modernization Embraer was awarded a contract in 2013 to modernize five E-99 aircraft to the E-99M standard through providing new mission consoles, IFF, electronic standby instrumentation, Link BR2 datalink, C2 software, Electronic Warfare Suite and Erieye long range radar. The first modernized aircraft was delivered in 2020, with the remainder expected shortly after.

Medium-altitude long-endurance unmanned aerial vehicle Procurement Recent documentation has outlined the Brazilian air force plans to expand its unmanned Surveillance and Recconsiance capability through the activation of four additional UAV units to augment the single one currently in operation. Current UAV capability consists of the Elibt Hermes 450 and 900 UAV’s, however there is little evidence that additional UAV systems have been acquired.

EMBRAER Overview • Space Agencies and Launch Center • Satellite Programs

EMBRAER in the post-Covid-19 scenario

Founded in 1969 as a state‐owned company, EMBRAER was privatized in 1994. It is now primarily owned by institutional investors. The stock of EMBRAER is split between the BM&FBOVESPA exchange of Brazil and the New York Stock Exchange (NYSE) of the US. It should be noted that the Federative Republic of Brazil retains a golden share in EMBRAER. This permits the state to veto a change of company name and logo; activity regarding military programs (whether domestic or otherwise); and transfer of control of the company. In late 2018, Embraer and Boeing agreed on the strategic terms under which they will merge the majority of the commercial business of the former, as well as form a joint venture (JV) under which they would jointly market the KC-390 transport aircraft.

2020 was a difficult year for EMBRAER. Besides the global COVID-19 pandemic, Boeing announced it would withdrawal of a proposed partnership with Embraer that would reflect the creation of a Joint Venture with an 80/20 split for Boeing and Embraer on 25 April 2020. Boeing focused on Embraer's commercial aviation segment, which represents the 50- to 146-seat aircraft market with a value of USD 2.225 billion in net revenue in 2019. Embraer had invested around USD 90 million to separate employees, physical structures and IT systems to prepare for the JV. Embraer had 18,734 employees before the pandemic and this work force was reduced to circa 15,500 by the end of 2020.

Commercial Aviation Impact - Despite the extremely negative impact on aviation worldwide, Embraer's commercial Aviation segment did not suffer cancellations. In the USA, given the availability of the aircraft and its low operating cost, especially at a time when flights have been in low demand and density, the E-175 has been the most used model in the recovery and resumption phases of commercial flights. In the first three quarters of 2020, Embraer delivered 16 commercial jets, against 54 aircraft in the same period in 2019 - 70% reduction. To avoid order cancelations, Embraer has negotiated to postpone deliveries, as is the case of the Brazilian airline Azul, totaling 59 Embraer aircraft.

Executive Aviation Impact - The Embraer Executive Aviation market did have cancellations, however, the number of deliveries remained high in the context of a global pandemic; there were 43 orders in the first three quarters, against 62 in the same period of 2019, a 30% reduction.

EMBRAER Defense and Security

More than 20 foreign military air fleets operate aircraft designed and manufactured by Embraer. Embraer military aircraft in service include AMX ground‐attack and air‐support aircraft, AMX‐T training and armed reconnaissance jets, EMB 145 AEW&C (including in ELINT and MPA variants). Embraer also produces the Super Tucano, a light-attack/trainer aircraft for the Brazilian Air Force which employs Embraer aircraft in more than 50% of its fleet. The first series production aircraft was delivered to FAB in December 2003. In 2018 the first series production KC‐390 completed its maiden flight and went to full production. With a contract for 28 aircraft for Brazil being placed in 2014, Portugal also signed in 2019 for five KC-390. Meanwhile, the aircraft completed its airdrop testing in late December 2019. The Defense and Security market remains a significant bet of the company in times of crisis. In 2020 Embraer delivered 10 EMB-314 Super Tucanos to Nigeria, the Philippines, and Chile and two KC-390 for the Brazilian Air Force. Another six KC-390 are in production: five for Brazil and one for Portugal. The arrival of the first Gripen E to continue the flight test campaign in Brazil represents a reinforcement in Embraer's operations, as these other programs help maintain the company's financial health. Despite a more positive scenario that is approaching in the next 5 years, with the Brazilian Government's willingness to support Embraer's recovery, the company's situation is still delicate. With USD 2.18 billion in cash, its net debt is USD 2.37 billion. Within four years, this debt is expected to grow to USD 4.55 billion.

EMBRAER in the post-Covid-19 scenario

Embraer's revenue mix remains diversified: A full picture of 2019 shows that its total net sales were USD 5.45 billion. Commercial Aviation, which is experiencing its biggest crisis, accounted for USD 2.225 billion (40.9%). The rest are divided between the Executive Aviation markets with USD 1.4 billion (25.9%), Services and Support with USD 1.03 billion (19%), Defense and Security with USD 770 million (14%) and Other Businesses for USD 9.25 million (0.2%). Around 60% of Embraer's revenue in conventional years is generated by other businesses areas than Commercial Aviation. It is worth remembering that Embraer, together with the other companies it controls, operates in the segments of satellites, border surveillance, Super Tucano delivered to Afghanistan via the Sierra Nevada Corporation naval, communication and even urban mobility with “flying cars”. In times of crisis, where one area is deeply affected, the others help to sustain the company. It is difficult to measure the impacts on its supply chain, but since there were no major cancellations and with the strong diversity of segments in which Embraer operates, the company will go through a crisis, but bankruptcy remains unlikely.

Brazilian Space Activities • Space Agencies and Launch Center • Satellite Programs

Space Agencies and Launch Center

In Brazil there are two civil space-focused institutions: the Agência Espacial Brasileira (AEB) and the Instituto Nacional de Pesquisas Espaciais (INPE).

The Air Force has its own space area Departamento de Ciência e Tecnologia Aeroespacial (Aerospace Science and Technology Department, DCTA) and owns the two main launch facilities of the country, Alcántara (at Maranhao State) and Barreira do Inferno (at Rio Grande do Norte).

Traditionally, Brazil spent about USD 700 million per year on the space program and, as little success was reached both on the development of rockets and satellites, and, along with the economic crisis, most projects were paused from 2017.

To recover the capacity of Alcántara, US and Brazil signed an agreement on 19 March 2019 to exploit together the centre, but the Brazilian government also declared they are open to offer the facilities to other countries, including China and Russia, to launch their vehicles, with the aim collecting USD 50 million per year.

An attempt to loan the facilities to the US government was made in 2000 but it was rejected by the Brazilian Congress. Now, the plan is to only charge for the use of them, with the Brazilian Air Force keeping the control of the center. With the change of administration in the US, the future of this agreement is uncertain.

Satellite Programs

Brazil has an agreement with China called CBERS (Satélite Sino-Brasileiro de Recursos Terrestres, Land Resources Chinese-Brazilian Satellite), a program started in 1988, with six satellites launched since 1999. China owns 70 % of the shares of the program and Brazil the remaining 30 %.

The INPE has three Satellite Tracking and Control Centers (CRC) dependant to the Centro de Rastreio e Controle de Satélites (COCRC), which are responsible for the operation of the local satellites and is part of its Control Segment. Its infrastructure consists of the Satellite Control Center (CCS) located in São José dos Campos, São Paulo, and the Land Tracking Stations in Cuiabá (Mato Grosso) and Alcântara (Maranhão). The latter two are responsible for receiving and transmitting data to the satellites, using tracking antenna systems installed in these locations. They are connected to the CCS through a dedicated data communication network, which allows the data received from satellites to reach the CCS in real time and enables it to send commands to them.

INPE also worked on satellites, like the Equars and Mirax, the first to study the atmosphere and the second to study space, and the SCD-1 and 2 for data gathering for research. Brazil is also involved in the Sabiamar project with Argentina.

CBERS

The CBERS-4A was the sixth and last to be launched, on 20 December 2019, after all tests were successful at the Laboratório de Integração e Testes (Integration and Tests Laboratory, LIT) of the INPE. All the control and command systems for the program were developed by China.

In the case of the CBERS program with China, the operation and control of the satellites during the routine phase - including orbit adjustment manoeuvres to maintain the appropriate phase – shifts from Brazil to China, according to a unified program of the Xian Satellite Control Center (XSCC).

The functions related to the programming of satellite camera operations in response to user requests are carried out by the Mission Center in Cachoeira Paulista. However, the central element of all operations related to CBERS satellites and their mission control is the Satellite Control Center. Telemetry, Tracking and Command (TT&C) stations provide the link between control personnel and the satellite, in addition to be the stations used to acquire raw data from the CBERS data collection system, in S band.

SGDC-1

The main project on the area is the SGDC-1 (Satélite Geoestacionário de Defesa e Comunicações Estratégicas 1, Strategic Communications and Defence Geo-Stationary Satellite), which was built by Thales under a contract with the Brazilian company Visiona, and was deployed in March 2017, being the first of a planned series of defence satellites. A second was expected to be contracted by 2019, but this did has not taken place, a third is planned.

Visiona is a joint venture between Telebras Telecomunicações Brasileiras and Embraer Defense and Security. In 2018, Visiona announced the VCBU Project, the first satellite conceived by the Brazilian national industry. The VCBU cubesat originally appeared to validate space technologies in development by Visiona, notably the Orbit Control and Attitude systems, responsible for satellite navigation guidance and control, and Onboard Data Management, which allows the integration and control of all satellite components.

Amazonia-1

The Amazonia-1 satellite project of the INPE will be the first Brazilian satellite stabilized on three axes and will be a multi-mission satellite to monitor natural resources with a camera operating on three frequencies of the visible spectre and one on the near infrared.

The control system of the satellite was developed by INVAP in Argentina. While on February 2020 the tests were began, it is expected to be launched in February 2021

INPE, the AEB and the Instituto Tecnológico de Aeronáutica (ITA, of the Air Force) reached an agreement on April 2019 with the NASA to develop and launch a series of cubesats from 2020.

SKY Brasil-1

Airbus built the SKY Brasil-1 (also known as SKYB-1) satellite, based on the Eurostar E3000 platform, for high definition TV and used by DirecTV to cover Brazil.

Market Engagement • Market Entry Strategies • Procurement Procedures • Final Considerations

Market Entry Strategies

Competitive Bespoke offerings Strategically relevant products Brazil’s procurement strategy has for several years been to rely on A notable barrier to entry into the Brazilian market is its greatly reduced domestic suppliers wherever possible, especially in the manufacture of accessible market size, especially in foreign currency terms. There are platforms, but to seek design and technical support from overseas primes several strategic long-term commitments seen as critical to the continued where this capability does not exist. As such, the market entry proposition development of both Brazil’s defence industry and the modernisation of its most likely to appeal to Brazilian authorities is the provision of a platform or armed forces. As such, available resources will continue to be allocated to capability design outside the scope of Brazilian abilities, modified to existing programmes for several years into the period this study focuses Brazilian requirements, including agreement that the majority of on. Thus, firms would be well placed if they were to focus on these critical manufacturing take place in Brazil. capabilities as their entry into the market.

Industrial partnerships Ethical and Accountable Proposals The importance of industrial development to Brazilian procurement plans Corruption is undoubtedly a cause for concern among those operating in means that market entrants should be prepared to see offsets such as Brazil and there have been indications that malpractice has extended to technology transfer and workshare as a key part of their offering. Although defence procurement in the past. Corruption was already known to be a the UK has had some success in the sale of naval platforms to Brazil, the real problem in Latin America before the region‐wide scandal centred on UK has a relatively weak presence in the country’s defence industry. As Brazilian engineering firm Odebrecht came to light. Following the evidence of successful support of local industry is prized by Brazil, escalation of accusations and mounting evidence implicating politicians of developing in‐country activities is judged to be a key enabler of future several parties in a succession of countries, societal anger at what is now business. seen as a critical problem has become a key source of political instability and uncertainty in the region. Thus, a transparent and ethically managed policy will be a key enabler of future business.

Procurement procedures

Authority

Brazil’s Ministry of Defence is responsible for setting the direction of defence procurement and offset requirements, although historically substantial delegation of responsibility to the service level has been apparent. Within the MoD defence procurement is the responsibility of the Secretariat of Defence Equipment (Secretaria de Produtos de Defesa: SEPROD), which reports directly to the Defence Minister. SEPROD has oversight of three departments: Defence Products; Industrial Science and Technology; and Military Cataloguing, which collates requirements and market capabilities. SEPROD has control over acquisition policy and manages the import and export of defence products. It also represents the MoD in negotiations with other ministries and national and international forums involving defence equipment as well as issues related to science, technology and innovation.

Approval

Prior to the creation of the Ministry of Defence in 1999, each service had their own ministry with individual procurement policies and authorities. As a consequence, the armed forces continue to act as independent buying agencies and apply their own offset regimes loosely in accordance with the overarching guidelines. The policy was first outlined in the 2012 Defence White Paper, which stated: “The Defence Minister will delegate the power to implement the policies formulated by the Secretariat of Defence Equipment regarding orders and purchases of specific products to the three armed forces. This will remain subject to ongoing evaluation by the ministry. The goal is that the defence equipment purchasing policy is able to:

(a) optimise the expenditure of funds; (b) ensure that purchases comply with the guidelines of the National Defence Strategy and its development over time; and (c) ensure, in purchase decisions, the primacy of commitment to the development of technological capabilities in national defence products.”

The exception to this policy concerns major – and politically sensitive – procurements, which are run centrally by the MoD.

Procurement procedures

Brazil procures equipment by open competition (domestic and international), sole‐sourcing (domestic and international) and through government‐to‐government channels.

Competitive procurement In general, all Brazilian public procurement, including defence procurement, is governed by Law 8.666 of 21 June 1993, which covers the regulation of public sector procurements and contracting of services.

This law allows for five principal procurement methods: • Call of bids, • Price consultations • Letter of invitation • Contests • Public auction.

However military procurements can be exempted from these regulations at the discretion of the government and awarded on the basis of sole‐sourcing, international competition or government‐to‐government negotiation.

When defence procurements are not exempted from the public procurement law, the legislation specifies the use of the competitive call of bids method for public procurements over USD 280,000 and price consultations for bids between USD 28,000 and USD 280,000.

Procurement procedures

Procurement Legislation

• On 29 September 2011 then‐president Rousseff signed Provisional Measure No 544, which established special rules for defence products, purchases and developments. The measure aims to boost the country’s domestic industry and encourage increased R&D investment. The establishment of the Special Tax Regime for the Defence Industry is a key component of Provisional Measure No 544. RETID grants firms considered strategic domestic defence companies, exceptions from certain taxes. In 2012 the measures were formalised under Law 12.598/2012. Under the legislation, eligible national defence companies benefit from tax breaks of up to five years and export credit guarantees. The legislation established the RETID Special Tax Regime for the Defence Industry (for firms deemed to be strategic defence companies. To ensure compliance with 12.598/2012 and to enjoy the status of a national Strategic Defense Company, the majority of shares must be in Brazilian hands.

Procurement Transparency Procurements are generally transparent while being co‐ordinated by the air force, navy or army but the process can become heavily politicised when it moves up to the MoD. This is especially true of larger procurements such as the FX‐2 fighter competition and the navy’s Surface Ships Acquisition, which have both been handled at the ministerial level between Brazil and the bidding countries.

Bids and contracts are – other than in the case of sensitive procurements – published by the government at the following website: www.comprasnet.gov.br

Offset

While offset is a key element of procurement, Brazil’s services are flexible when negotiating offset benefits and are strongly focused on developing long‐term indigenous defence manufacturing capability. Due to its experience of acquisition and the complex nature of the equipment it purchases, the air force shows the highest degree of sophistication in its procurement methods and use of offset.

Final Considerations

Procurement observations

• Brazil’s defence procurement processes are aimed to provide a high degree of transparency while also encouraging the development of indigenous industrial capability.

• With the Brazilian armed forces emphasis on acquiring sophisticated systems that domestic industry cannot produce, the processes have tended to favor US and European companies who are willing to engage with local industry. Given the Brazilian governments goal of developing a world class military force over the coming decades, this is expected to remain the case at least until the 2050’s.

• In addition, increased economic uncertainty, which has been compounded by the Covid-19 pandemic, is expected to severely disrupt modernization plans, with key capabilities such as new Armored Fighting Vehicles, Multi-Role-Fighters and Principle Surface Combatants expected to be heavily delayed as a result.

• However, the determination for Brazil to rise to the role of a both a regional and potentially a world leading powert will mean these programs will be delayed, rather than outright cancelled.

For more information, please contact:

Inigo Guevara Managing Director of Janes Markets, Janes [email protected], and Industry (JEMI) Consulting Americas: +1 800 447 2273 Europe, Middle East, and Africa: +44 (0) 1344 328 300 [email protected] and the Pacific Rim: +604 291 3600

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