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Indian Grand Prix Means Nothing... In Context

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Sameer Gaur has a tough job. It culminates this week in India. He is the youngest of three sons and his father is the founder of Jaypee Sports International (JSI). JSI secured the rights to host the first-ever Formula One (F1) race in India and they've taken on the task of building a $400 million facility in which to host the grand prix.

The challenges faced by Sameer have been daunting. He had to figure out how to erect a cathedral of speed in a farmland of protesting farmers and low-income citizens. His father, Jaiprakash Gaur (80 years-old), engaged the promotional and development group in the quest to bring F1 to the nation and has charged his youngest son to fulfill the dream.

The family had big plans for the land they acquired-much to the now-present consternation of protesting farmers who succumbed to the purchase-with a safari or other attractions. They built a road and decided the road shouldn't end there. Why not a race track and why not make it for the pinnacle of motor sport? While we're at it, why not a city?

The circuit and race are the most prominent stories to come out of India but the development has much more in store. The success of the race is crucial because a projected city of 1 million people are depending on it.

The Gaur family and their subsidiaries, Jaiprakash Power Ventures, Jaypee Associates and Jaypee Infratech, are in deep debt and it's not just the $400 million they spent on building the racing circuit. That is only one component of the investment. The bigger dream? The Gaur family is building a city. A magnificent city intertwined with the theme of sports. It's a risky venture and one that has to work or it is could impact the value of their total real estate investment in the area.

A racing circuit, cricket stadium and a place to call home for 1 million people. Yes, one million people living in over 2 million homes. The size and scope of this project eclipses the paltry 600 acres allotted for the F1 track called Buddh International Circuit. The remaining 4,400 acres is established for the development of Jaypee City.

Cities have often evolved around what made them grow in the first place. Here in the middle of America, St. Louis was once the launching point to the west with trade and river access-a staging area of trade and supplies to explore the western part of America. Las Vegas was a gambling town in the desert and New York is a business hub replete with fashion and culture. What is Jaypee City centered on? Sports. That is a first in the history of the earth and it could be a large gamble but then Las Vegas was too.

The removed F1 fan views the rumored $25 million per year sanctioning fee--the price paid for the honor of hosting the series--as significant and it is. Usually there is a 10% escalator attached for the term of the contract on top of the $25 million per year. That too is a large sum of money. What we rarely see is the total investment and money that stands to be made from the development of the land in the Greater Noida region of India.

The Gaur family's investment of Rs. 1,220 per square meter has exploded to Rs. 18,000 a square meter. The theory is that the race could lose money for the entirety of the contract and Jaypee Sports International will still survive on the development alone. It's not hard to see why local farmers are disgruntled with their reluctant sale of the land and feel they were not given a fair market price. The development, they say, has not created jobs for them and taken away what little opportunity they had in growing produce for sale.

According to Forbes, some observers have claimed JSI will be free-cash-flow negative for 10 years due to the enormous investment so the development must work and the debt will need to be re-classified in a manageable vehicle such as an IPO or equity issuance. Cash flow is king in these developments and restraining your resources through land investment and construction is a difficult task. Jaypee's ability to survive its initial investments and generate cash flow will be their biggest test--not how many backsides they can get in the seats at this weekend's race.

The Indian Grand Prix has not been without its controversy. The government hasn't classified it as a sport, rather an entertainment, and seen fit to attempt to tax the race, driver's salaries, impose import duties and other periphery taxation programs. This all fly's in the face of what one would have assumed was a detail to be cleared first and not just weeks before the first race.

The government has asked JSI to deposit 25% of all ticket sales into an account until such time as they can make a ruling on F1 tax status as a sport or entertainment. The duties and taxation issues have been covered by JSI so far and the cash is flowing in one way--out. Everyone, including the government, wants a piece of the pie and yet JSI failed to secure government involvement form the beginning which perhaps could have prevented some of these issues.

The lingering embarrassment of the CommonWealth games and the corruption it bred is still pungent in the air and some have drawn association from Sameer to the now jailed Suresh Kalmadi (who is facing corruption charges for his role in the Dehli Commwealth Games of 2010) but JSI maintains their course and hasn't let allegation, hints or innuendos derail their focus.

India is apparently full of opportunities and with it comes a host of opportunists as well. One has to work very diligently to even find the official Twitter account of the grand prix circuit as several accounts claim to be and have fought online for the honor. Its an odd notion that the rule of law seems the have not manifest itself in this burgeoning economy and perhaps no surprise in a land where some women are still named "unwanted" by their parents in favor of sons. The cultural revolution and adherence to business acumen have clearly trailed in the wake of opportunities present.

In the grand scheme of things, the inaugural F1 race in Jaypee City is small potatoes. It's the city itself and the development in total that holds the key to the success of F1 at this location. This week another consortium is exploring the possibility of building a second circuit in India. It's an initial foray into the possibility but a second look nonetheless.

The upside is an emerging motor sport fan base in a country that is cricket-crazy--if not cricket-weary. A new sport and new action is at hand and with a population as large as India, perhaps there is room for another sport--the big question is, given the average income of an Indian citizen, can they afford to like F1 and attend the races? Will they buy hoses in Jaypee City and will they lure big business into the area for manufacturing and development.

To invest in area has always been a better plan than to throw money at people with no long-term goal. JSI has the right intention as they attempt to bring big business to the area but the governments desire to tax F1 may also be a road block to luring these businesses to the sparkling city of Sport that is known as Jaypee City.