AUGUST 25, 2009

Indian government rules that Formula 1 is not a sport

The Indian Ministry of Youth Affairs and Sport has vetoed a payment from Indian Grand Prix promoter JPSK Sports to Formula One Administration, saying that Formula 1 is not a sport. The payment of $36.5m should have been made in January but JPSK had to ask permission of the Reserve Bank of India, which controls all international transfers, under the terms of the Foreign Exchange Management Act. The bank referred the question to the ministry, which rejected the request, arguing that the sport might be "an entertainment" but was fundamentally a "commercial initiative". It argued that India does not need F1 and that the same money could be spent on other sports which would be more relevant to the general population. This is, of course, an irrelevant argument as JPSK has no plans to spend the money on anything other than F1.

The news is the latest twist in the story of the Indian Grand Prix, an idea that has been kicking around for 10 years. The concept has been championed since the late 1990s by British businessman Michael Taub. In recent years he has been supported by an Indian entrepreneur named Sunder Mulchandani. They were hoping for Indian government backing for the project and a deal was originally announced in the middle of 2007 involving the Indian Olympic Association (IOA), which is headed by Suresh Kalmadi, a member of the Indian National Congress political party, which is the leading player in the United Progressive Alliance (UPA), the ruling coalition that supports the government of Prime Minister Manmohan Singh. Kalmadi served as a junior minister in the national government in the 1990s.

The IOA, however, failed to find the funding needed and had to withdraw but in November 2007 a new deal was announced involving JPSK Sports, which was owned by the vast Jaypee construction conglomerate. It later emerged that Kalmadi's son, daughter and son-in-law are all shareholders and directors in JPSK, as is Mulchandani. During 2008 JPSK negotiated a deal over land with the state of Uttar Pradesh, which is run by Kumari Mayawati's Bahujan Samaj Party. This was allied to the UPA until June that year but then withdrew its support. This clearly did not go down well with the government. The deal with Mayawati was done in September, with 2500 acres being declared a Special Economic Zone. The plan is to use 1000 acres for the race track and the rest for other developments, in a project which will ultimately cost around $500m.

It may be that the project is being blocked by the government because of the involvement of Mayawati.

JPSK says that it remains committed to the project despite the glitch. Bernie Ecclestone will no doubt be willing to give the Indians a certain amount of leeway because he is keen to get the sport into the Indian market, and to get his hands on the estimated $400m that JPSK has agreed to pay in fees in the course of the next 10 years. This means that the race contract will start out at around $25m a year and will rise by 10% for the 10 year term of the contract. The inaugural Grand Prix is scheduled for 2011 and work will need to begin fairly soon if there is to be a circuit built in the time available. The construction itself should not be a problem because that money will remain inside India. However, JPSK may be a little unwilling to start paying out for the building work when the contract is not 100% certain. Ecclestone is not going to be keen to sit around and wait for the Indians to sort themselves out.

The rejection of the payment has been confirmed by Sameer Gaur, who runs JPSK. He says that the project is continuing and that his company is still fully committed to getting the event organised in 2011.

"We are building a motor car racing track capable of holding an F1 race," he said. "It could be used for other purposes too, like a motorbike race."

He says that the ministry is overlooking the economic benefits of the race for tourism and the country.

All things considered this is a very bad advertisement for India and does little to encourage the international business community to get involved in the Indian markets. Having said that, we may now have an explanation for Force India team owner Vijay Mallya's failure to pay his bills in F1.