Formula 1 Racing, the Economy and the Environment 1.

Identification The Issue

Malaysia is the first country in the South East Asia to have a Formula 1 track, second in Asia, with Japan being the first. Formula 1 is currently the third most watched live sporting event, second only to the Olympics and the World Cup. It is the most watched racing event in the world. In fact, Formula 1 brings in much needed revenues to the countries. Even America, is vying for the Formula 1 races, who recently just renovated the Bridgestone tracks to comply with the strict Formula 1 standards. Most important of all, the circuit brings in racing fans from all around the world. The sport will be a part of the tourist attraction in the country. Tourism has always contributed a large amount of Malaysia's revenue and has brought much of the foreign exchange. The Formula 1 Circuit has brought the country some relief from it recent economic crisis in the Mid 1997. However, things does not happen magically, rather it went through a lot of environmental changes to the area of Sepang, which was where the Formula 1 Circuit is located. With the increased influx of foreigners coming for the event, the Malaysian culture will be going through some changes, not only in terms of the auto racing but also influenced by foreign cultures.

2. Description Background of Kuala Lumpur International Airport (KLIA) Project

Sepang International F1 Circuit is part of the Kuala Lumpur International Airport (KLIA) project, which was proposed in 1994. One might be surprise on how the SIC is part of the KLIA project. The KLIA project does not only own the Kuala Lumpur International Airport but also the Formula 1 racing circuit. The whole KLIA project is management by the Malaysia Airline Berhad. The KLIA project covers an area of 10,000 hectare, and is the first in the world to use the airport in the forest concept. It is located in a new township called Sepang, in the state of Selangor. Sepang was an agricultural land and it is 10 per cent of Selangor agricultural land. However things have changed, Sepang is now set to become Selangors No.1 economic growth center before the turn of the century. The once poorest district revolved around plantations and farming, would now see changes. Agricultural activities would make way for the massive economic developments planned and the sector would embark on a concentrated

approach. According to Selangors former Mentri Besar, Tan Sri Muhammad Haji Muhammad Taib, the earnings of the farmers will be enhanced via modern equipment and methods. He also added that until end of 1992, plantation took up 43 per cent of the total land area while another 24 per cent were used for small holders and government reserve land. The Sepang district was also the Selangor states 10 per cent of the states total agricultural land. Some 2,000 hectares of land are being developed by private companies, federal and state government agencies for housing, tourism and hotels, small and medium scale industries, and commercial use. There are promotions of special airfare packages to promote the use of the new KLIA. This whole event will bring mutual benefits to both KLIA and SIC. (Singh: 1994)

Sepang F1 Circuit (SIC)

SIC is not just any ordinary racetrack. Instead, it will be a racing track with a veritable forest resort, complete with a peat swamp wetland botanical garden, a lake for water sports as well as orchards. The circuit is about 260ha, which started out in September 1997 and it was completed in 15 months. This circuit cost RM286 million and certainly has some quality as German outfit Tilke Engineering, who did the A1-ring circuit in Austria, built it.

See Table 1 for the circuit details. This circuit has the only double- frontage grandstand in the world, which is nearly a kilometer long. The grandstand is capable of taking in 30,000 spectators while its natural hillstand could accommodate some 100,000 spectators. Due to the fine design of the circuit, the visibility of the whole track is up to about 60 per cent for a spectator and this can only mean more involvement and excitement. The circuit offers the world best world-class facilities for riders in terms of garage and pitstops. There is also an operation theatre to handle minor surgery for injured drivers and this give the drivers confidence over racing on the racetrack. The circuit is equipped with the state-of-the-art electronic systems including on-line, realtime tracking system for the racecars. It is also the first track in the world to install the electronic Marshall post. Because of its excellence, SIC was the first in the world to incorporate the F1 logo in its name in March 1999. Since SIC is built for the Formula 1 machines and could accommodate the

motorbikes, it is regulated by many international regulatory bodies and has met all their requirements. Among these regulatory bodies are the International Motorcycle Federation (FIM) and the International Automobile Federation (FIA). (Star Publications:1999)

Table 1 : Circuit's Details

Total Area Pit Building No. of Pits Grandstand Capacity General Admission Track Length No. of Turns Straights Width Longest Straight Gradient Widest Run-Off Gate Entrance Source : Malaysia Grand Prix 90 hectares L:350m W:24-30m 30 units 30,000 80,000 5,542km Left:5 Right:10 8 16m (T1:18m; T2:20m; T15:25m) 928m (T15 to T1) T2T3:-5.6%; T9T10:+3.67%&nbspp T-13 to T-14 8

The Trade
Some of the greatest benefits of the Sepang F1 Circuit would be to gain international recognition and promotes Malaysia. Besides the publicity, such an event would draw, the country would benefit in many ways. For one, as the Prime Minister said, Malaysian could learn from the technology related to engine design and production. The nation could also learn to fabricate their own car

transmission system and especially the engine. However the question of capability arises as Malaysia is a young country and the impact might be negative, if the technologies advance too fast, while its people are still ignorant. Will people in the future be wondering about the civilization, which Malaysians had experienced after seeing the Malaysian Petronas Twin Tower and the Sepang International F1 Circuit? They might be thinking that Malaysia was one of the most advanced countries with advance technologies in building but it was actually a disguise. Nevertheless, many are still convinced that the target is for SIC to bring in revenue from foreign countries.

Cost
There are some critics who felt that the SIC would not contribute to a healthier Malaysian economy. They said that it had burdened the country as RM286 million was invested on a racing track. Moreover it is undeniable that the Formula 1 and the Grand Prix are expensive sports. Each track that wishes to hold the GP will have to pay US$8 million (RM30.56 million) a race. Malaysia has bought the rights to be part of the World F1 GP for the next seven years. Malaysia Airports Berhad (MAB), the management for the SIC, have also signed a five-year contract with an additional five-year option to renew to host the World Formula One Championship from 1999 (Sapiee:1999). Some might say it is a guarantee that the SIC is a sound investment as contract are signed. However, it might be otherwise as the support for SIC might not be up to the expectations in generating revenues. Worst scenario which may happen is that SIC might be forced to operate due to the five-year contract even when it is running at a lost.

Revenue Generated
Although the sport is expensive but revenue generated by it is huge. Melbournes Sunday Herald Sun described the Formula One as that giant vacuum cleaner that sucks up money at an alarming rate but also brings in annual revenue of more than RM1 billion (US$261.78 million). For example, the Australian Grand Prix event, some RM40 million (US$10.47 million) has been invested in advertising and promotions, and marketing for the four-day event and at the same time the Melbourne business community were reported to have generated an income close to RM200 million (US$52.36 million). Even the official caterer for the Grand Prix made an access of RM20 million (US$5.24 million) in profit, catering to some 400,000 spectators who turned up throughout the four days. (New Straits Times: 1998).

Through ticket selling alone, the expected sales generated from just the grandstand tickets are about RM50 million (US$13.09 million). There is also some 60,000 three-days passes ranging from RM250 (US$66) and RM500 (US$131) for the natural stand surrounding the 5.542km-long circuit were also offered through several international ticketing agents in Europe. The SIC have ticketing agents in 22 countries. Among another 40,000 passes are some one-day passes, twoday passes and also some three-day passes being sold locally. Other than targeting the SIC to just the Formula 1, the circuit can also target other events like the Motorcycle Grand Prix held in April 1999. Although there has been a poor turnout rate at the Malaysian Motorcycle Grand Prix race, it was estimated to bring total earnings from the tickets and corporate suites amounted to about RM2.705 million. However the question of will the tickets sell always ring in our minds. No doubt the figures calculated might seemed possible but taking such a big risk is dangerous. Moreover, the FIA is interested in helping some other Asia countries in building their own circuits. Malaysia will have to compete with the other new circuits like Zhuhai Circuit in China (third in Asia). The Merdeka race, the Proton race series, Saturday night racing, and concerts are among the planned function, which may be held at SIC in the future. With its modern facilities, to attract foreign participants to use the pit facility at the circuit to store their racing vehicles would bring in some more revenues. Commercial companies that are interested to shoot advertisement at SIC will have to pay the rental of RM40,000 per day. There are other facilities like international go-kart track, fourwheel drive/motor-cross/rally circuit and the proposed motor sports theme park, which could help to generate more income. No doubt that they sound like some big money making schemes but there will also be heavy fixed operating cost incurred. This also increase burden to the SIC (Sapiee:1999). Another great way to generate revenue was through broadcasting and advertising. The Formula 1 event was the second most watched after the Olympics in terms of followers. There are 2.5 billion people watching each of its 17 faces and research shows that 64 per cent of Formula 1 home viewer are in Asia. Broadcasting and advertising rights as the event was estimated to have reach 200 million people worldwide. But the race was televised live to 130 countries with an estimated 330 million viewers. For a good one and half-hour, all eyes will be on our country. If we work out the advertising cost of one minute on TV and multiply it by 90, we can get some idea of advertising value this circuit gives us. SIC will be able to bring in more sponsors as most of the tobacco companies are restricted from advertising in several European nations. This is true to some extend. The event have a lot of viewer, but the broadcasting rights are not controlled by the Malaysian government but by the FIA (Kumar:1999).

The Spillover Tourism Industry

Apart from giving the country worldwide exposure, there will be spin-offs for the tourism industry. Tourism industry would greatly benefit from SIC. There will also be a lot of revenue generated for the advertising industry. Hospitality sector will improve their status, as the auto-racing events might bring in great effects of tourism into the country. It promotes the country not only as one of the tourist attraction but will also attract sport lovers from all over the world. The Malaysian Government has also aimed to attract some 30,000 tourists for the F1 Grand Prix. Malaysian race was among the cheapest as compared with the other Formula 1 races. Although the tickets might be expensive for some, but the current focus is to bring in tourists who could afford it into the country. There are tickets sold to the foreigners and most tickets are bought from countries like Singapore and Hong Kong. There are some upper-class people watching the race who are used to using helicopter around and have to source for the helicopters from Singapore and Hong Kong to meet up with the demand. More revenue was also expected from the 2,000 people who will travel with the F1 teams who would be racing in Sepang. There are 11 teams and each of them will bring between 150 and 220 people. These people would likely to become tourists. More than 100,000 people will flock to Sepang next October to watch the event and many of whom will be wealthy enthusiasts who will spend a lot of money. Hotel and the hospitality industry will benefit greatly from Formula One. Entertainment, accommodation and food for their staff (Sapiee:1999).

Technologies
British Government funded trade mission will explore Formula 1 business and technology possibilities in the region. They aimed to make Malaysia a regional center of excellence for motor sports with the cooperation of British motors ports industry. With the purchase of Lotus by Proton and with the collaboration of Petronas with Sauber, Malaysia is keen to improve its automotive industry through motor sports. This is also one way to encourage the growth of car industry and motor sports in the country. It might also give birth to new potential athletes in motor sports racing. However it does not only benefits the country as a center for motor sports development center but also the region as it is cheaper for foreign teams to base themselves here. The circuit would also complement the rapidly growing automotive industry and the need for research and development center. Malaysias aim is to be able to develop their own Formula 1 engine so that they would not depend on other for the technology. The aim was also collaborated with Malaysias other investment in engine, Lotus, as mentioned in the above. The Malaysian petroleum company, Petronas could also benefit in participating in Formula One racing. It could, for instance, research and

develop its own lubricants, which would surely add to the bottom line of the company (Yunos:1998).

Environment Effects
Despite all the benefits from the SIC, there are several undeniable impacts it has on the environment. First of all, there has been some deforestation going on like cutting down the trees especially the palm oil trees as the district used to be palm oil estates. According to the Bank Negara (National Bank) Malaysia Annual Report 1998, palm oil industry is the second major foreign earner bringing in a total revenue of RM17.8 billion, and followed by the tourism industry with RM9.3 billion. Palm oil is clearly seen as more dominant as compared to the tourism industry. The question that people have in mind is that since palm oil industry is bringing more revenue into the country, so why would Malaysian government wants to turn the palm oil estates into the KLIA project and by the amount of tourist the formula one is bringing in, it might not be able to justify the losses of the palm oil estate? The Malaysian government is not going to just cut down the palm oil trees and not be bothered but vice versa. They had reallocated them to other government lands in other states in Malaysia. Moreover the 10,000-hectare of palm oil only made up very small percentage of the total Malaysian palm oil lands therefore the impact was minimal. On top of that, through modernization, the Selangor State gained as well as now Sepang district is the biggest revenue earner for the state and it will also bring in international recognition to the country. Opportunity cost of using the land for Formula 1 project instead of oil palm are not excessive. The prices for oil palm has dropped and in terms of monetary, the palm oil industry was losing. Nevertheless, the prices were quoted in US Dollars and between the exchange of Ringgit and US Dollars, the price conversions were more favorable for the Palm Oil industry. The prices dropped were also caused by the increasing competition by other third world countries. It became the buyers' market whereby the buyers can have a better bargain.

Source: Bank Negara Annual Report 1998

Secondly, land proposed for the project has to be cleared to make way for the new development. People are worried about the lack of oxygen level in the air as it involved 10,000- hectare of land (SIC - 260-hectare). The Malaysian government has already reallocated some amount of palm oil trees to be planted in other government lands therefore the oxygen level will still be at a safe level. Although this process of replanting the palm oil trees might take some time, nevertheless government has not overlooked this problem and taken step to prevent it. Moreover, the Malaysian government is not moving its goal away from palm oil. In fact, they planned to expand the total area of the palm oil industry. Refer to the table 2 below. Inspite of the economic slowdown and the price decreased for oil palm, the Malaysian palm oil industry has experienced a remarkable achievement in 1998 (http:\\www.mpopc.org.my\overview.htm:1999).

Table 2 : Oil Palm Planted Area : 1975 - 1998 (hectares)

Year 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988

P.Malaysi Sabah a 568,561 629,558 691,706 755,525 830,536 906,590 983,148 1,048,015 1,099,694 1,143,522 1,292,399 1,410,923 1,460,502 1,556,540 59,139 69,708 73,303 78,212 86,683 93,967 100,611 110,717 128,248 160,507 161,500 162,645 182,612 213,124

Sarawak 14,091 15,334 16,805 19,242 21,644

Total 641,791 714,600 781,814 852,979 938,863

22,749 1,023,306 24,104 1,107,863 24,065 1,182,797 25,098 1,253,040 26,237 1,330,266 28,500 1,482,399 25,743 1,599,311 29,761 1,672,875 36,259 1,805,923

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998

1,644,309 1,698,498 1,744,615 1,775,633 1,831,776 1,857,626 1,903,171 1,926,378 1,956,573 1,987,190

252,954 276,171 289,054 344,885 387,122 452,485 518,133 626,008 715,736 842,496

49,296 1,946,559 54,795 2,029,464 60,359 2,094,028 77,142 2,197,660 87,027 2,305,925 101,888 2,411,999 118,783 2,540,087 139,900 2,692,286 147,007 2,819,316 248,430 3,078,116

Source : Department of Statistics, Malaysia : 1975 to 1984

The new development will mean more pollution, flood problems and erosion. The local population are concerned that their health will be jeopardized by there recent increase of development. This issue made the government to increase the control on the development projects along the riverbanks and reserves in the Sepang district. The move, stated in the Draft Structure Plan for Sepang District 1995 to 2010, will prevent flood problems, erosion and pollution in the district. The case of Ulu Kelang Tower in Kuala Lumpur, which collapsed in 1994, had opened the eyes of many. The incident was caused by soil erosion, which is due to not upkeeping the land areas around it properly. This was one of the main factors why the Highland Tower collapsed. Once development for the Sepang district is approved, although proper land survey and land upkeeping are important, the procedure might not be followed closely by the developers. This will lead to the land pollution and soil erosion. As there is a river flowing through the Sepang District, construction workers might just dump the waste into the river, if measures are not taken to avoid this. Health issues for the local occupants will occur due to this dumping of waste or construction waste into the river.

Cultural Effects
As it changes the environment from agricultural base to a new developed town, cultures of the people living in the 10,000-hectare of land changed. The palm oil estate workers were moved from the Sepang district to other palm oil estate to work. Palm oil estate workers were the ones, whom were mostly displaced and reallocated to some other government lands. Some have stayed there many years but was forced to leave the district. However this is not such a bad picture as they still hold a job as palm oil estate workers. But to some others who does not want to move from Sepang district will face unemployment. Even though there are a lot of job opportunities since so much of development has happened, they will have to face with re-skilling themselves. Secondly, with so much of developments in Sepang district, which once lack of modern facilities has now changed. Examples are more schools for the childrens education, better hospital facilities, and more job opportunities. The Sepang District Council plans to provide more-trading opportunities for residents by building a two-hectare Sunday market and a RM3 million hawker center. The wet market will be expanded to accommodate more farmers to market their produce. Thirdly, with so much of foreign sponsors coming in especially through advertising, many people are going to be influenced. Peoples beliefs or principles might be affected if method of advertising is not appropriate. Furthermore most of the Formula 1 fans are from western countries and the Malaysian will get too much exposure from the western cultures and values. This does not imply that the western cultures and values are negative but rather does not fit into the way of life of the Malaysian cultures. This might created what is called the generation gap between the younger generations and the older generations as the younger generations are influenced by western cultures while the older generations are by the traditional Malaysian cultures. With the Formula 1 circuit near to home, there will be more Malaysian or Southeast Asian car racers born. Like Malaysians very own Alex Yoong, he had just gotten himself into the F-3000 races. However his main aim was the Formula 1 racing and with the SIC, his chances of fulfilling his dreams seemed possible.

Other Issues
There are also others issues which is of concern like the land sales in Sepang district. The palm oil estates in Sepang district were given to the palm oil estate owners through the New Development Plan. These landowners are free to sell their lands, as they want. However many landowners in Sepang and its neighboring area have been duped into selling their land after being led to believe that these properties have been gazetted for acquisition by the State Government. The landowners have sold their land for only RM20,000 per acre

when the price could go as high as between RM100,000 and RM120,000 per acre when the land is fully developed in a few years time. 3. Related Cases
Other Related TED Cases Other Circuits Related Malaysian Sites Malaysian Formula 1 Malaysian Grand Prix Department of Statistics Ministry of Tourism Formula One Related Sites

ANTARCTICA

Australian Grand Prix Brazilian Grand Prix Canadian Grand Prix Johor Circuit Monaco Grand Prix Other Circuits in Malaysia SIC

Alpha Formula One

AQABA

F1-Live

BALITOUR

F1-Magazine

BERMUDA

F1-Today

TRUCK

Tour Packages

Formula One News

EGYPT

Langkawi Island

F1 Supporters OrganisationOfficial Site Formula1.co.uk Formula1.com Shell-Ferrari Formula One Site

FRANCE GALAPAGOS

Straits of Malacca JE Virus

GERMAUTO

Malaysian Tin

JAMTOUR

Kedah

SpeedNet-Formula One Directory The Journal of Formula One Sport

MEXICO

KLIA

YOSEMITE

F1 Ticketing Agents

DailyF1

II. Legal Clusters 5. Discourse and Status:

Disagree and Allegation

6. Forum and Scope:

Forum: Selangor Government

Scope: Sub-state
The Selangor State Government will govern most of the things concerning the environment, quality of life and some general laws like the drug traficking law. On the other hand, the Federation Internationale D'Automobile(FIA) and the International Motorcycle Federation (FIM) are two governing bodies of SIC as in its circuit. For example, the condition of the place, the facilities up to their standard, the formula 1 cars, and basically everything regarding the race. As for tourists that wants to enter Malaysia, they are restricted by the Malaysian foreigners entry requirement.

7. Decision Breadth:
1 state (Selangor) The FIA governing the rules and regulation of the automobile of 116 countries. Like most of the new car designed will be tested at the FIA for approval.

8. Legal Standing:
Sub-state law

III. Geographic Clusters 9. Geographic Locations

a. Geographic Domain: Asia b. Geographic Site: East Asia c. Geographic Impact: Malaysia

10. Sub-National Factors:

Yes

11. Type of Habitat:

Tropical

IV. Trade Clusters 12. Type of Measure:

Regulation Standard

13. Direct v. Indirect Impacts:

Direct

14. Relation of Trade Measure to Environmental Impact

a. Directly Related to Product: No b. Indirectly Related to Product: Yes Tourism It has a lot of impact on the tourism industry as it will bring a lot of sports lovers from all around the world to watch the Formula 1 race. As the neighboring countries in East Asia are ranked highest among the tourists, whom have visited Malaysia, will likely to visit again for this exciting event as the Formula 1 races in Japan are so much more expensive as compared to Malaysia's
c. Not Related to Product: No

d. Related to Process: Yes Habitat

15. Trade Product Identification:

Formula 1 Circuit

16. Economic Data

Table 2 : Oil Palm Planted Area : 1975-1998 Major Foreign Earnings for 1998

17. Impact of Trade Restriction:

Low Impact

18. Industry Sector:

Tourism

19. Exporters and Importers:

Exporter: Many Importer: Malaysia

V. Environment Clusters 20. Environmental Problem Type:

Pollution on Land and Waste Here are some measures taken by the Sepang City Council to prevent the pollution and land erosions. Measures taken 1. Set a minimum allocation for river reserved for development near the river. 2. Tightening existing regulations on development near river reserves. 3. Reallocate squatters who are preventing river-widening projects. 4. Privatize activities such as river rehabilitation and landscaping. (Martin:1995)

21. Name, Type, and Diversity of Species

Name: NAPP Type: NAPP Diversity: NAPP

22. Resource Impact and Effect:

Low Impact but Regulatory

23. Urgency and Lifetime:

Low and 100s of years

24. Substitutes:
Conservation efforts - Reallocation of the agriculture land loss.