Chile stamps a minor share of its state-controlled copper revenues each year as the military's sole funding stream for buying new weapons. Exploding copper prices in 2004 nearly trebled cash flows into military spending accounts, but Chilean generals are unlikely to see very much of these funds as they seek to relieve a growing list of unfunded acquisition priorities.

Chile's unusual financing mechanism for arms purchases – a relic and anachronism of Gen Augusto Pinochet's military dictatorship – is being challenged by top political leaders, led by the outgoing minister of defence Michelle Bachelet.

The reformers' goal is to improve how the income from copper revenues are budgeted by the military services and force the service arms to pay off existing acquisition debts before they are allowed to launch fresh spending programmes.

Government officials have seized control of roughly $350 million in surplus copper revenue generated by the spike in prices, providing the military with the estimated $240-250 million it receives during normal years in copper sales.

The three service arms still have the right to spend this smaller portion using their normal procurement process, which is to divide the funds into roughly even thirds and make their own spending choices. Consequently, Chile's civil administration and parliament have had no oversight into the military's decision-making process for new weapons.

The surplus copper revenue has opened the door for government officials to intervene on this process. This larger portion of the military's income from national copper sales is being used to establish a process to define joint weapons acquisition needs set by civilian officials and provide a financing stream to pay for them.

With copper prices expected to stay at record levels for several years, the government's power grab also reasserts civil control over a significant share of the country's arms purchases each year.

That could drive changes in the Chilean military leadership's traditional preference for US-made goods. For example, Bachelet was credited as the driving force behind Chile's purchase last year of used Dutch frigates, rejecting a rival bid based on used US warships.

US industry remains a major presence in Chile, with Boeing winning a recent deal to equip the Dutch ships with Harpoon Block IV anti-ship missiles. But US industry sources are also downplaying the potential for a new windfall fuelled by the surging copper prices. The increasing rate "doesn't necessarily bode well for more defence sales", says Ron Covais, Lockheed Martin's president of the Americas. "Chile has put a lot of decisions on the naval side that have pretty well put US ships out of the market."

For Covais, a more significant threat is the future of Chile's fighter purchases. The Chilean air force has ordered 10 Lockheed F-16C/D Block 50s, and has been eyeing an order for a second batch of 10 by 2008. That increasingly appears as an unlikely scenario despite the rise in procurement funds. However, Covais is hopeful: "With the additional funds available we do see it as potential for follow-on buys for F-16s."

Moreover, the loss of the surplus copper funds comes as the air force faces rising debt related to the F-16 purchase. The cost of airframes has remained stable, but the total cost of the programme has surged with separate purchases of US-made engines and largely Israeli-made short- and medium-range air-to-air missiles, says Armen Kouyoumdjian, a Valparaiso-based Chilean adviser for London's International Institute for Strategic Studies.

The increasing costs of the programme has put on hold new aviation acquisition requirements generated by the order for new fighters. The F-16s were to have created a supplementary need for modernised tanker, lead-in fighter trainer and search-and-rescue (SAR) helicopter fleets.

Chile had been reviewing a purchase of a modernised, boom-equipped Boeing 707 or a boom upgrade to an existing 707. The Raytheon T-6A Texan II JPATS trainer was considered the leading contender for the lead-in trainer requirement, and a diverse international competition was emerging for the projected SAR need. But each of those programmes have been put on hold, says Kouyoumdjian.


Source: Flight International