The get set, go economy

SATBIR SINGH, A FARMER, might not be able to tell a Ferrari from a McLaren, but he knows that cars were largely responsible for his current fortune. His land in Greater Noida in Uttar Pradesh was bought by the state government in 2007 for
Rs 7.5 lakh a bigha (1.75 acre). He claims to have sold around 500 acres, and made close
to Rs 22.5 crore.

Sitting in his house in Jaganpur village, Singh says that the land, which was ancestral property, is now part of India’s first Formula 1 racetrack. The Rs 1,600 crore, 800 acre track, Buddh International Circuit, is being given the final touches before the homologation (approval, in plain English) starting Aug. 3. Assuming it gets approval, it will host the 17th round of this year’s Formula 1 World Championships in late October.

Singh’s house, easily the grandest in the village with its granite façade and airconditioners in almost every room, is the most obvious way in which the F1 track has affected the local economy. It was also sheer luck that his land was on the right side of the 165.5 kilometre Yamuna Expressway. On the other side of the road, villages such as Dhankaur may still have the typical crowded lanes, buffaloes roaming around, stray dogs sniffing at cakes of dried cow dung, and saffron flags fluttering in the breeze atop pink temple towers. But that’s set to change soon.

Economists, real estate analysts, brokers, and urban planners believe that the arrival of F1 could change the economic profile of the region as it has done for cities around the world such as Kuala Lumpur and Melbourne. The change can already be seen. Real estate prices have surged, with the F1 track being a USP for many property dealers. A number of luxury hotels and shopping malls have also come up.

But the recent farmers’ agitation against land acquisition in Greater Noida is a major roadblock for various projects, including the track, built on agricultural land. In May, farmers from the village of Bhatta-Parsaul, a 25-minute drive from the track, launched a protest against the state government, demanding higher compensation for their land. A political twist was provided when the Congress party and Bharatiya Janata Party joined in. The severity of the situation is such that the race is under serious threat.

DESPITE THIS, THE OPTIMISM that surrounds mega sporting events in a region can’t be ignored. In Britain, for instance, the east side of London is being massively redeveloped to match the fancier west side before the 2012 Olympics. Cities in South Africa boast of great infrastructure, which was put in place for the 2010 FIFA World Cup. And despite all the troubles with regard to organisation and cases of corruption, even Delhi’s infrastructure—airport, metro connectivity, roads—got a boost last year before the Commonwealth Games.

Ron Walker, the former mayor of Melbourne and the force behind bringing F1 to the city, says, “We believe Melbourne gets A$100 million [Rs 483 crore] worth of publicity annually because of the Formula 1 race.” An official study in Austin, Texas, one of the venues which will feature in the F1 calendar from 2012, expects an economic impact of up to $400 million (Rs 1,773.6 crore) locally. The organisers there have also set up initiatives to connect and convince the local community about the opportunities arising from F1.

Unfortunately, unlike a London or a Johannesburg, which invested in understanding minute details of how the community will be affected by the sporting events in the near term and in the long term, it seems that no such study has been done for the F1 race in India. “Just like environmental impact studies are done, I think the government should also mandate socioeconomic impact studies to be done on any sporting project of this scale.,” says Shailey Kedia, researcher at the nonprofit policy research firm The Energy and Resources Institute (TERI), who is currently assessing the impact of mega sporting events on the developing world, particularly South Africa, Brazil, and India.

In India, unlike most other countries, the local government is not organising the F1 event. The state government decided to start the Yamuna Expressway project as a public-private partnership (PPP) along with infrastructure conglomerate Jaypee Associates. That deal meant that Jaypee also got development rights to a chunk of land along the road as a means to recover its investment: a 2,500 acre envisaged sports economic zone, which would include the F1 track.

Sameer Gaur, managing director and CEO of the race promoter Jaypee Sports International (JPSI), a company set up separately to develop the race track, says, “The state government wanted a unique property to develop along the corridor through to Agra. That is why we looked at something like F1, which is new to India. We see this race changing the area, similar to how one Maruti factory came to Gurgaon and reshaped the entire region.”

While 30% of the investment for the track came from bank loans, the rest was raised internally. “The actual running of the track and the licence fee part should break even in the next three to four years. The cost of construction of the track will be subsidised by the real estate development,” says Gaur.

Vicky Chandhok, president, Federation of Motorsports Councils of India and advisor to JPSI, says that as many as 5,000 jobs could be created in the long term. “There is a sound business model at the heart of it. The entire sports economic zone will certainly help the local economy.” In three years, the promoters claim they will finish constructing a 100,000-seater cricket stadium, the largest in North India, along with separate facilities for football, hockey, archery, boxing, and other sports.

DEVELOPMENT IN INFRASTRUCTURE also boosts the real estate development of a region. “It may result in increased real estate prices, as the demand for areas surrounding the proposed development will grow,” explains Santhosh Kumar, CEO-operations, at real estate consultancy Jones Lang LaSalle India. Corporates such as Accenture and Metlife were lucky to arrive when the rents were lower. With large companies setting up shop in the area, the demand for housing will also go up. Developers have been quick to launch apartment projects all along the expressway. In Jaypee Sports City, per square yard rates have gone up from Rs 15,000 to Rs 22,000 over the past 18 months.

Greater Noida is also likely to see an increase in the number of tourists, once the F1 track is ready and races begin. International hotel chains such as Radisson, are sensing this and are investing. Radisson Blu, a 175-room property, is being developed at a cost of Rs 160 crore, some 10 kilometres from the F1 track. The location makes it the hotel closest to the action. The teams are likely to queue up for rooms. “We anticipate that the F1 event is going to change the perception of the location. And ultimately, the track and racing-related activities will bring business for about 30% of the year,” says Suraj Kumar Jha, general manager of the hotel.

Hilton Hotels & Resorts, which is associated with F1 as a sponsor to team McLaren Mercedes, already has two new hotels in Mayur Vihar near Noida. Other international players, such as Starwood and Glow Studios, are anticipating a surge in demand once the F1 track is finished; both are building hotels in the Greater Noida region.

However, betting on Greater Noida to attract foreign tourists, the way races in Singapore and Malaysia do, could be risky. The future of the Turkish Grand Prix is uncertain because attendance has been low with a lack of interest from the locals and foreign tourists alike. But ex-F1 driver and commentator, and chief executive officer of sports management firm 2mb, Mark Blundell, believes that India is different from Turkey in one crucial aspect—there’s an active motorsport culture. He says the support from domestic race fans would be enough to drive the event forward.

Real estate and hospitality will undoubtedly be among the largest beneficiaries, but the F1’s impact on the auto sector cannot be underestimated. India has little by way of high-quality testing facilities for cars; auto research and development centres already see the track as a potential testing bed. Also, at least four companies are interested in running the racing school that’s going to be built as part of the F1 complex.

“I don’t know if the world knows there are strong auto ancillary businesses and tyre businesses running out of India. Look, for example, at the support system that Maruti has. It is an opportunity for them to showcase their technology to the world,” says Tony Fernandes, the founder of Malaysian airline Air Asia and owner of the Lotus Formula 1 team. Fellow Malaysian Razlan Razali, CEO of the Sepang International Circuit, adds that in 1996, bringing F1 into Malaysia was part of the then Prime Minister Mahathir Mohamad’s grand plan “to put the country on the global map.”

THE OWNER OF THE ONLY INDIAN F1 TEAM, FORCE INDIA, and UB Group chairman, Vijay Mallya, says that India’s participation in F1 through teams, drivers such as Narain Karthikeyan and Karun Chandhok, and now its own race, send out a message not just to the world but to itself. “To be competing in this high technology world where 1,000th of a second matters is a matter of inspiration for youngsters of this country,” he told Fortune India on phone from Silverstone, Britain, where his team had just completed an impressive qualifying performance for the British Grand Prix.

Mallya closely followed the Formula 1 for many years, and when the opportunity came to buy the Spyker team for €90 million (Rs 574 crore) in September 2007, he couldn’t resist. These days Force India is riding high, fuelled by its large young Indian fanbase and respectable finishes. Mallya claims the team has the second-highest visited website in the grid, with only Ferrari beating it in online popularity.

But how does it benefit him as a businessman? He claims that his own brands such as Kingfisher and Whyte & Mackay have benefited the most from being associated with the sport. “Force India is a great platform to build a brand like Kingfisher globally,” he says.

The main F1 event is just one weekend in the year, but experts say the track will be used for several classes of races for as many as 32 weekends every year. The track, which is being constructed by nearly 7,000 workers, has attracted major interest from several automobile manufacturers, including Volkswagen, which is likely to bring Audi and Porsche class racing to India.

“The business of racing is huge and that will get a boost. The growth rate of motorsport has been the same as the auto industry. India is the largest market for two-wheelers in the world, and we sell 10 times as many two-wheelers as four-wheelers. It is only a matter of time before MotoGP come to Greater Noida,” says Sanjay Sharma, head of motorsport at JK Tyres. His company, and Chennai-based MRF, have been sponsoring motorsport in India for the past 20 years.

All of this spells steady income for JPSI, which will be paying close to $40 million (escalating by 10% every year) over the 10-year contract to Formula One Management (FOM) as licence fee for the race. This is over and above the premium it can charge for the real estate around the track, which forms a little more than three-tenths of Jaypee Sports City.

Ultimately, the real fuel for the race is the marketing platform. With a worldwide viewership of 527 million during the 2010 season, F1 is the third most watched sporting event globally, after the Olympics and the FIFA World Cup. The latter two are held once every four years unlike F1, which could have as many as 21 races from next season. Fernandes claims that his high-decibel marketing efforts through Formula 1 has led to Air Asia becoming a recognisable global brand.

This reach seems to be what Indian telecom major Airtel India is betting on, as it tries to build itself as a global consumer brand. Sources within the company have confirmed that Airtel signed on the dotted line to be the title sponsor of the Grand Prix at a cost of nearly $14 million a year for five years. Others, including Mercedes-Benz, Tag Heuer, Shell, JK Tyres, and Amity University, are at various stages of their marketing endeavours.

Sources say that energy drink company Red Bull, which owns both the current world champion Sebastian Vettel’s team Red Bull Racing and team Torro Rosso, will be bringing in F1 cars to go around the street at Rajpath in New Delhi, come October.

The F1 entering India is in keeping with the larger trend of the globalisation of sports; the FIFA World Cup is entering new markets, as are the Olympics. Countries that see motor sports as an economic phenomenon have welcomed Bernie Ecclestone’s F1; Asia alone has gone from just one race in Japan (till 1998), to races in Malaysia, Shanghai, Singapore, Abu Dhabi, Bahrain, Turkey, South Korea, and now, India.

HOWEVER, THERE ARE FEARS that the land acquisition controversy may derail the arrival of F1. Rahul Gandhi of the Congress party accuses the state government led by chief minister Mayawati of acquiring land for various projects from the farmers at lower-than-market rates.

“My party’s opposition is to the method by which land acquisition has been done and is not project-specific,” says Manish Tewari, spokesperson of the Congress party. “Personally, I wonder why land should be acquired and given by a government to set up a facility for what is ultimately an elite sport, instead of the promoters doing so commercially.”

Balbir Punj, senior BJP leader and member of the Rajya Sabha, agrees. “What is happening in Noida and Greater Noida over the past three to four years is that under the pretext of serving public interest, land is being commercially exploited,” he says. The best way to help farmers and ensure that they are not short-changed, adds Punj, is to make them stakeholders in such commercial projects.

Nobody from the state government responded to Fortune India’s queries. There seems no solution in sight, even as the fight between the Congress party’s heavy hitters, including Rahul Gandhi, and Mayawati intensifies.

JPSI’s Gaur concedes that the promoter needs to do more to involve the local population. “More homework could have been done by us.”

What he and his team can do is concentrate on making sure that the show goes as perfectly as possible. Within the country, there’s a buzz in motorsport circles that there will also be F1 tracks in Goa and Mumbai. While there are doubts about how many such multi-million dollar tracks India could sustain, there’s no doubt that on the last Sunday of October this year, it’s not just Vettel, Michael Schumacher, Lewis Hamilton, and Fernando Alonso, who will be eyeing the winner’s podium. It’s also going to be people such as Satbir Singh who might celebrate with some champagne. After all, they have profited from the rubber burning on land their fathers left them.