By Joyce Lee
SEOUL (Reuters) - South Korea chose on Monday Korea Aerospace Industries Ltd (KS:047810), which expects to partner Lockheed Martin Corp (N:LMT), to develop a mid-level fighter jet that will cost around 8.7 trillion won ($7.88 billion).
The Defense Acquisition Program Administration (DAPA) also confirmed its decision to upgrade South Korea's Patriot missile system, with Raytheon Co (N:RTN) chosen to upgrade the launch systems. PAC-3 missiles will be bought from the United States.
South Korea has been trying to bolster its arsenal in the face of a missile threat from North Korea.
"Once the Patriot upgrades are completed, the warheads of North Korean ballistic missiles can be struck directly, and minimizing damage to the ground," DAPA said in a statement.
Reclusive North Korea sporadically test fires missiles on the Korean peninsula, most recently in protest against annual U.S.-South Korean military exercises.
The KF-X mid-level fighter jet program will aim to develop jets to replace aging F-4 and F-5 fighters by 2025, as well as adding air defense for its sole foreign partner, Indonesia, which is paying a fifth of the development cost.
KAI beat out Korean Air Lines (KS:003490), which had partnered with Airbus (PA:AIR).
The PAC-3 missiles will be built by Lockheed Martin. The total upgrade is expected to cost about 1.3 trillion won ($1.18 billion), two people with knowledge of the matter said.
Both declined to be identified because the details of the projects are confidential.
With South Korea's arms procurement budget increasingly constrained, some analysts have questioned the viability of the fighter jet project. A state-run South Korean think tank estimated the KF-X program would need an additional 10 trillion won for production.
Indonesia agreed last year to pay 20 percent of the development costs.
DAPA's estimated budget requirement for arms procurement in 2016-2020 was 96 trillion won, up from 72 trillion won DAPA estimated for 2015-2019, Yonhap reported this month.
The budget has already been hit by high-profile purchases such as the 40 Lockheed Martin F-35 fighter jets for 7.34 trillion won finalised last year, and four in-flight refueling tankers for about 1.4 trillion won under negotiation.
DAPA declined to comment on the cost of the projects, or on Lockheed's involvement.
Lockheed Martin said it was committed to supporting the KF-X program but did not have any immediate comment on the Patriot upgrade. Raytheon could not be reached for immediate comment.
($1 = 1,104.0000 won)