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Why a Formula 1 cost cap might work this time around
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Posted By: James Allen  |  09 Feb 2014   |  2:21 pm GMT  |  159 comments

The priority for Formula 1 this year is to get costs under control and there are signs that the first steps towards achieving that may be within reach.

It was announced by the FIA at Christmas time that a budget cap would be brought in for 2015 and behind the scenes in recent weeks there have been extensive discussions which have proved more fruitful than in the past. The main stakeholders are all engaged: the teams, the FIA and the commercial rights holder.

F1 almost tore itself apart in 2009 when then FIA president Max Mosley tried for force a budget cap of €60 million on the teams and Ferrari led a rebellion which led to the teams announcing in July 2009 that they would leave F1 to start their own series.

This time round things are different; the bar is being set much higher, the object is to find consensus among the teams and there is a stronger desire to control costs. Although the teams share around $700 million a year between them in TV and prize money, it is not evenly distributed with the top teams taking the lions’s share and everyone far too dependent on sponsorship, which is elusive. So we have several teams close to the edge financially, unless they have a rich shareholder willing to write cheques to make up the shortfall.

The problem with Mosley’s approach to budget capping was that it was too confrontational and that it set the bar too low at the outset for the top teams. There was no way that Ferrari, Red Bull and the well funded teams would accept cutting their budgets by three quarters in one hit. In more recent times, Red Bull has become the team out on a limb, not wanting to give up its superiority which has been built on huge resources, which in turn buys the best people.

The way to achieve a budget cap is to start out by setting the ceiling at an acceptable level to the top teams and then set a gradual glide-path downward over a number of years to a level that works for the sport.


Although this doesn’t help the medium sized teams in the short term, what it will do is start the process, embed the principle of budget caps in the FIA Sporting Regulations and then gradually move the cap down to the right level whereby the teams can become self sufficient and can even turn a profit if they are well run.

It will also mean that the medium sized and smaller teams benefit more from assistance and collaborations from the top teams. We are seeing that already with the reduction in wind tunnel time to 30 hours per week. This allows the top teams to rent out tunnel time to the smaller teams. Also, for example, a team like Force India might get an engine, gearbox and whole back end, including suspension from Mercedes, or Sauber might do a similar deal with Ferrari. This would reduce costs for the smaller teams and also alleviate the pressure for customer cars, which some powerful figures would like, but which a strong majority is against.


Bernie Ecclestone has said today that he will offer €1 million to any whistleblower who informs the governing body if a team is cheating the budget cap. This is an inspired idea, as it’s a significant enough amount of money for someone employed at a team in the finance department or in the factory to consider risking their job for.

“The plan under consideration is to give €1 million to any whistleblower whose knowledge is proved to be accurate,” he told the Express. “We will then say to the team that the following year you will lose three of the maximum points you have scored. Then let’s see if they want to cheat.

“We have approved the budget cap. It is going to happen. Everyone agreed to $200 million. What hasn’t been agreed is what is in the $200 million.

“Unless we include everything, I am sure people will find ways around it. It’s going to be difficult.”

There are suggestions that the starting figure might be £200 million rather than dollars, but if they can get this across the line – and it seems from talking to the teams as though there may be a chance of consensus this time – then it will be a major breakthrough and the start of an important process.

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1

Let me throw out a question to the readers.

Given a choice between (a) a budget cap of 200 million euro per team would could be enforced (and let’s just assume it actually COULD be enforced) or (b) a more equitable sharing of the profits of F1 among the teams, which would you chose?

Both have the same end result, of closing the gap in spending between the have’s and have-not’s. They just tackle it from different directions. The first option lowers the amount the big teams can spend while the second increases the amount the poor teams can spend.

2

What whistle can the small teams blow?

Only the top teams can afford the whistles.

It’s softer, slower, nosier, lesser, anything but speed.

3

Is this budget cap going to include engines? Presumably not, because how do you police how much Ferrari pays Ferrari for an engine, for example.

And what about teams sharing parts? If Ferrari spend $50m developing a gearbox and sell it to Marussia for $10m, does the full $50m count against Ferrari’s total budget, or is it $40m? Presumably the latter, because that would encourage the big teams to share technology and help the lesser teams, but then that means they can setup a customer parts business as a way of getting round the budget cap.

4

First was the shape of the cars, then refuelling (the best part albiet dangerous) and now many other things e.g. going green and sustainability. How can luxury (of its own kind), speed and glamour be controlled for spending ludicrous amounts of money. There will always be ways around.

5

Cap the budget and free up the technical regulations. That would make for interesting engineering ideas

6

It would probably lead to one team finding a big advantage (e.g. Brawn with the double diffuser), but nobody else would be able to afford to respond. It’d make for a very dull season.

7

James,

This budget cap concept does throw up a lot of other possibilities, which haven’t been talked about.

We currently have a limited number of gearboxes per season, use any more and you face a grid penalty. As for the engine, there are new laws this year I believe. You still have a limited number of engines per say for the season, but they have allowed you to interchange parts of the new power plant, a number of times, without it affecting the total number of engines. You can explain that better than me.

Here is a new idea. We limit the number of new front wings and rear wings to the car per season to say 5 in total. That means the team can only bring 5 new designs of the front wing or rear wing to the track. There will be allowable changes to the wing for dry and wet running. Charlie Whiting and his team, put the wing in a jig or rack and take a digital picture of it, noting all the key parts, and give it a number, say number 1 out of 5. Use anymore new designed wings and you face a grid penalty. Of course you can bring as many example of the wings to the track, of say number 2 design, because your driver may have an off and damage the wings. But you’re only allowed 5 new designs per season.

The amount of money spend on wing design is massive, running into the many, many millions of dollars. This type of expenditure would stop, and thereby allow the smaller teams, to be just as creative with their designs as the bigger teams.

A future option would be to allow only the two main drivers to do just 2,000KM of testing each during the season. But allow the team to undertake 10,000KM in total, with the remaining 6,000KM been done by the third driver, development driver, or some form of test driver. This would also include tyre testing times. It would allow the “junior” drivers to gain valuable car experience, and the teams to see how there perform.

8

We’ve had engine and gearbox limits for years to cut costs, but somehow it doesn’t seem to have worked. The testing ban didn’t seem to cut costs much either, and had other unintended consequences.

I’m not sure limits on number of wings really works either, unless you’re going to go the whole hog and only allow a certain number of updates to the whole car – but then that gets very difficult and complicated to police.

9

This certainly looks like a fairly big positive step in the right direction.

However, at risk of being too pessimistic let’s not forget that we’ve been here before. When the 2009 budget cap was rejected the teams came up with the Resource Restriction Agreement (RRA) as an alternative. The plan? To get the biggest teams’ costs down incrementally. Alas it all started well but once the belt was meant to be tightened further some teams left the RRA unhappy/sceptical with how it was being policed (or so they say). Cue another round of spending. So, yes, this is good news but the road will be long (and probably winding!).

10

The RRA was as the name implied though, just an agreement. And then supposedly some of the teams decided they longer wanted to be a part of the agreement.

The new cost cap measures will be in the regulations. If a team wants to be in F1, they don’t have a choice whether or not they want to be a part of the new cost cap. They can of course choose to break the rules, but being caught doing so will come with a penalty. Hopefully that penalty would be significant enough to deter teams from breaking the rules.

11

A budget cap in F1 is quite unworkable, for reasons which have been endlessly discussed over the years.

Discussion of a budget cap seems to function as a distraction from those measures which *could* very easily be implemented … for instance, a more equitable sharing of the spoils.

12

So if Ferrari say that RB is cheating and RB is found guilty, will Ferrari get 1 milion?

13

Ferrari would never accuse RBR of cheating!

14

Yeah I should probably add 😉

15

Whilst a budget cap offers financial stability to a team, I think from a fan’s perspective this could be very intering if all other cost related restrictions are removed e.g.:

No limit on engine or gearbox quantities…use as many as you can afford.

No limit on testing…do as much as you can afford.

This would mix things up, depending on where teams prefer to spend money.

16

We often here about discussions behind the scenes but what does this actually mean? Is it really individual team principles speaking on the phone with others or are some teams in the habit of having conference calls? Do Horner, Wolff and Dennis etc sit down for a nice skype call over a cup of tea?

How much do you know about what happens or possibly more interestingly how it happens behind these infamous closed doors James?

17

Any sport, system or industry ultimately breaks down when it becomes too complex and top heavy. The good news is that most are able to renew themselves after working through such a crisis.

Go karts anyone? No, thought not. This is Formula One! Around and around we go…superb article and a fantastic comments thread. Love it!

18

Frankly there’s probably little chance of the process not descending into chaos as per usual.

However if,

a) all the revenues from TV rights are earmarked for equitable distribution between teams.

b) the process was overseen/managed by the teams themselves or an independent body………There might be a glimmer of hope

But all thats occurred in the past was those who one would expect to get the lions share did so by hook or by crook and those that one could have reasonably expected to safeguard the best interests of the sport were too busy getting what they could from the trough..

If history serves then what one can expect teams to receive is the leftovers…so little change expected with over half the teams unable to compete in any meaningful way while CVC/Ecclestone continue to bleed the sport dry.

Was amused with Ecclestone’s $1m whistleblower bounty, but when that other whistleblower (Gribkowsky) spilt the beans on F1 last year his reaction was far less charitable….

19

“When that other whistleblower (Gribkowsky) spilt the beans on F1 last year his reaction was far less charitable….”

Understandable really: He did bribe the guy in good faith 😉

20

read it and weep people

1974 world championship

7 different winners

6 different pole winners

33 teams across the season

63 drivers competed in at least 1 race

14 customer car teams

19 factory teams

2 all american teams (parnelli, penske)

the championship was won at the last race.

the total budget for a top team was around 750,000 pounds! an individual driver could secure a 1 race deal for about 4000 pounds.

a race ready cosworth dfv was around 8000 pounds.

there were lots of new young chargers and the grid was chock full of talent. fittipaldi,peterson,lauda,reutemann,scheckter de-pallier, hulme, mass, ickx, jabouille, amon, regazzoni, revson, donohue, andretti, watson, jarier, pace, hailwood, pryce, hunt…

the cars didn’t all look the same and there was more than 1 tyre manufacturer.

what more would an f1 fan want.

f1 2014 has lost the plot.

21

Interesting analysis. Significantly, 1974 was the year many western economies went into melt-down because of the oil crisis. That caused inflation to be rampant in many western economies (because the price of petrol increased four-fold) and hyper inflation plagued many western economies for the rest of the 70s. Many western countries switched to neo-liberal economic strategies in the 80s (famously Thatcherism in the UK) which controlled inflation but caused the gap between haves and have nots to soar. The neo-liberal economic strategy has affected Formula 1: for example, in the mid 70s a driver earned 10 times what a mechanic’s salary would be. Today, the pay gap between a salaried mechanic and a salaried driver (i.e Alonso) could be as much as 200 times higher, even more. So in a way, the mid to late 70s was a turning point for western economies and Formula 1 too.

22

well said gaz boy. i picked 1974 as it is exactly 40 years ago and the the sport was just starting to see the arrival of bigger sponsorships like tobacco. 1974 budgets were significantly more than 1970 but less than 1980.

the point is that f1 was financially a lot healthier and dare i say more competitive.

any team that could develop a competitive package was welcome, young drivers got a chance and the cars were much more exciting to watch. the main downsides were safety and reliability.

anyone who hasn’t seen ronnie peterson in action has really missed something. bottom line is that better racing can be had at much less cost than today’s f1. too bad BE nicked all the loot.

23

Chris, couldn’t agree more with your comments. In 1974 and 1975, James Hunt annual salary was around £200,000 a year. That was a huge amount of money in the mid 70s, but a chief mechanic make take home a salary of £20,000, in other words the ratio between drivers and mechanics was 10:1. There’s a income distribution graph called the Geni co-efficient which measures income distibution in the western world, and if you look at the early to mid 70s the income distribution in the real world outside of F1 was about the same: in other words Formula 1 and western society was at its most equal in terms of fiscal distribution during the 70s. However, the emergence of Thatcherism and Reganism (as well as Mr E, Clinton, Blair and Brown) would erode that financial equality and we are living with the consequences both in the real world and in F1. Formula 1 is a very accurate barometer of western society.

24

Not in a million years! The pressure is too high. The FIA cannot introduce the most complex formula in the history of F1 and expect teams to stick to a defined budget cap. It’s practical! As Christian Horner says you can’t introduce a cap from the top down. If this is ever to be done it will have to be from the bottom up. When this finally sinks in perhaps it may happen some day. As for the whistleblower, they would never work in F1 again! When common sense prevails and the formula is simplified/restricted then the possibility will exist for reducing costs, but not before.

25

SO if they buy an engine, gearbox, rear end and powertrain assembly, that’s at least 1/2 a customer car already, isn’t it?

26

Yep, after that all they need is a hood ornament and a bobble head.

27

I don’t suspect the idea is for a whistleblower to put their own team in it. Surely anyone who did that would basically be ending their career in F1. Even outside of F1, you’re someone who turned your back on your own team and people for a million.

I think the idea is more to point the finger at other teams, or for people connected to F1 who might have some insider knowledge but are not actually employed in a team. And there are always people moving from one team to another. Putting your own team in it is one thing, but moving to another team and then putting your former team in it… well that’s just playing the big F1 game.

28

I have never understood why Max and Bernie were not prosecuted for fraud by the EU for the sale of the F-1 commercial rights for a ridiculous sum… There is no way that was not an insider deal.

The EU should void the contract and sue to recover the funds and then the FIA should structure an equitable distribution scheme. A fixed sum for each team and then an additional sum based on results.

29

i agree flyboy. the max / bernie deal lies at the heart of all f1’s money problems,

30

Can anyone tell me any sport where a budget cap has been implemented and actually worked ?

I’m aware that many sports have salary caps to attempt to stop individual, cash-flush teams from buying all the good players but I’m not aware of any sport (or even a business) where there is a budget cap that is meant to cover the whole operations of the entire business entity ?

31

NFL seems to work just fine. Incredibly competitive top to bottom, big markets to small markets. Budget caps and league wide revenue sharing by the teams (TV included).

32

That’s the sharing part that is off the limits wiht current F1 structure.

33

If there’s a €2 million budget cap per team, doesn’t that effectively give Red Bull €4 million given they have two teams?

34

Anyone in a position to know enough to blow the whistle would probably lose more than a million euro by sinking their career. No matter how many laws you make, career success comes down to whether employers like you. And they won’t like you if they see you as a bounty hunter.

35

It won’t work. Unlike in a sport where most of the cost are transfer fees and salaries, in an engineering sport like F1, you cannot have works teams like Ferrari and pure F1 teams like RedBull under the same set of financial regulations. That would require forensic accountants, which the teams will never allow, as the “whistle blower” idea by Ecclestone just proves.

If the teams agree to a salary cap, then they do it in the full knowledge that it won’t work. They might prove me wrong, but I doubt it.

36

1 million is too low. I think Bernie factored in the loss of job for the whistleblower, but not the loss of reputation. It’s potentially a career ending move to divulge sensitive information, especially if you work in something like the accounts team. Who would hire that person again and trust them with sensitive information, inside or outside F1? The reward should be higher so that the loss of career is compensated. The right intentions but like most of the announcement today, it’s just a starting point, something to build on.

37

I imagine that someone who is willing blow the whistle on their employer for a quick million is not going to worry about their reputation 🙂

But if one million is too low maybe the reward should be the amount that they can prove their team has exceeded the budget cap?

38

It’s €2 million if they blow the whistle on the last race of the season.

39

Easily the best comment I’ve read today 8:)

40

Brilliant!

41

budget capping is a great addition to the rules but the reward system should also be made fairer to reduce the insentive to cheat. for example a race winner earns 22 points and last car 1 point with the distribution of funds inline with the points distribution. this will introduce fairness and reduce hardship in the sport.

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