83 replies to this topic

[Hans V]

F1 has been a financial arms race for a long time now. Ferrari has traditionally been the one leading this race, but is now being outspent by Red Bull and perhaps Mercedes. The sign of the times are that McLaren, the premier advertising object in F1, apparently is struggling to land a new title sponsor, Lotus the number 3 team in F1 is haemorrhaging  money and on the verge of bankruptcy.  Sauber is also in financial dire straits and betting their future on some shady Russians. Force India is depending on regular cash injections from its owners who both are in all kinds of financial troubles. There surely a lot more bad financial news in F1.

 

To be really competitive you need a budget of approximately half a billion dollars a year. Half a billion dollars to field two racing cars in twenty races! Quite a large slice of that money goes to aerodynamic R&D. F1 combined is each year spending billions of dollars on aerodynamics that has very little or no relevance to anything outside F1. That is just plain absurd.  

 

I think a budget cap, although not optimal, is the best solution given the current situation, the inability of the team principals to think of anything else than their own short term interests  - and the fact that F1 is turning into a dinosaur facing extinction (demographics are aging and increasingly uninteresting for sponsors) in a not too distant future. As a Financial Director for many years I believe the budget cap is enforceable. Given that the rules are crystal clear and sanctions will be seriously harsh. It will require a lot of auditing, which will cost quite a bit, but peanuts compared to the savings. It should, however, be combined with cost effective rules-changes. Like single plate standard wings (without the DRS nonsense).

[e34]

A cost cap is impossible to police in F1, unless they force every team to use off-the-shelf components. 

 

How much does it cost a Ferrari custom made nut made by its F1 team? And how much if it is made by its road car division? And if they order it to a provider that also supplies pieces for their road cars?

 

And if Red Bull uses an advanced material developed for another series, what part of the development costs should be input to the F1 program?

 

Even in the fairest of worlds a cost cap would only operate approximativerly. In F1 it would never be operative. 

[dau]

-Hello, is this Renault?

-Yes

-Hi this is Red Bull. I wonder how much do your engines cost per season?

-Oh our off the shelf price is 18 million, but since we like you folks we would like to sell them to you for 50 pence and an egg sandwich

-Awesome

-By the way, we were thinking of creating a new blue version of the Megane Sport, would you be interested in badging it the Renault Red Bull Megane Sport ?

-Certainly, how much do you think that will cost

-Oh about 18 million

-Deal

And this would not get noticed how exactly?

 

There could be rules that any supplier must make available same goods at same prices for any buyers.  So if Renault tried to sell engines to Red Bull for $1000, they'd have to sell to any team for the same $1000.  There could also be rules to prevent any contract work that isn't for deliverable goods (and those deliverables would fall under the previous rule.)  This would prevent an outside contractor from providing only engineering work that the team would then manufacture themselves.

 

Of course, what to make of Ferrari's interest in Le Mans, which would use an engine based on the F1 engine?  How could you prevent bits made with the Le Mans budget from entering the F1 stream?

I thought about that as well. Maybe sort of what the CRTs in MotoGP were like: Let the engine manufacturers spend whatever they like, but every engine has to be available at a set price to anyone interested. Then again, that didn't really work out in CRTs either, iirc.

[dau]

A cost cap is impossible to police in F1, unless they force every team to use off-the-shelf components. 

 

How much does it cost a Ferrari custom made nut made by its F1 team? And how much if it is made by its road car division? And if they order it to a provider that also supplies pieces for their road cars?

 

And if Red Bull uses an advanced material developed for another series, what part of the development costs should be input to the F1 program?

 

Even in the fairest of worlds a cost cap would only operate approximativerly. In F1 it would never be operative. 

If Ferrari orders its nuts and bolts from the road car division, they will have to be accounted for. If they're selling them for much less than they're worth, than sooner or later, someone will notice if it is policed adequately. Probably not if it's nuts and bolts and other cheap parts, but the more expensive it gets, the higher the risks. Like in EthanM's example - if your Companies House accounts say that you've bought Renault Meganes for 18m while getting engines for free basically, that will be pretty hard not to get noticed. Also, it doesn't have to be perfect. If we can get the budget difference from hundreds of millions down to tens of millions, it would be a big step already.

 

Anyway, we can discuss this all we like. In the end, what i see is a chance. If the budget cap works, F1 could finally become sustainable again. Which could in principle mean removing all the cost-saving technical restrictions that are bugging fans so much, step by step. We could even dream of returning to a more open engine formula, with in-season testing and teams having the money to try out crazy solutions they can't right now. Young talents would have a realistic chance over mediocre paydrivers, new teams could be joining financed by sponsors instead of bored millionaires. If the cap doesn't work, we're at exactly the same situation as we are now, with some teams spending more than others. There's absolutely nothing to lose. So why not give it a try?

Edited by dau, 10 December 2013 - 10:02.

[Khars]

Well, there will be a long debate and idea will be postponed by 1-2 year, then dropped, then introduced again...

Just check the 2 mandatory pit stop idea... There was a long discussion, and they dropped the idea to introduce the double points for last race... 

 

Anyway, at budget cap the control would be the tricky part. Not to have hidden costs, tricky bills, strange salaries, etc.

What if the FIA can buy the main parts from manufacturers and sells it to teams at a fixed price (or FIA intruduces fixed prices for engines, tyres, etc.)

But if you have the same equipment for all teams (engine, even aero, etc), to buy, build and race, it will be like lower series or closer to customer car idea... (and kill the development race of F1). There could be teams, but no real constructors.

[DrivenF1]

Just be very clear upfront that any team found breaking the budget cap through creative methods will get a fixed penalty of $100m if it's a material amount. Anything below has stepped penalties. One team will try it I'm sure and get heavily stung.

 

It's possible to police and audit a system like this but it's impossible to pick up everything.

[Frank Tuesday]

Just be very clear upfront that any team found breaking the budget cap through creative methods will get a fixed penalty of $100m if it's a material amount. Anything below has stepped penalties. One team will try it I'm sure and get heavily stung.

 

It's possible to police and audit a system like this but it's impossible to pick up everything.

So let's assume that the budget cap is $100M.  $100M penalty for going over that.  Red Bull has an estimated budget of $600M.  They set aside $100M of their budget for penalties, and they still get to spend $500M.  Even a $100M penalty isn't going to stop the big teams from spending whatever they can get their hands on.  The penalty will have to be much more draconian to stop it.  Championship exclusion would be a bit too far in most cases, but what about 1 point deducted for every $500k spent over the cap? 

[EthanM]

And this would not get noticed how exactly?

 

I thought about that as well. Maybe sort of what the CRTs in MotoGP were like: Let the engine manufacturers spend whatever they like, but every engine has to be available at a set price to anyone interested. Then again, that didn't really work out in CRTs either, iirc.

 

who says it wouldn't be noticed? Renault trades engines for naming rights, Red Bull racing gets engines, Red Bull GMBH buys ad space on Renault cars. You will ban b2b?

[MrPodium]

Just be very clear upfront that any team found breaking the budget cap through creative methods will get a fixed penalty of $100m if it's a material amount. Anything below has stepped penalties. One team will try it I'm sure and get heavily stung.

 

It's possible to police and audit a system like this but it's impossible to pick up everything.

 

There are so many ways that you can set up company structures using LLP's, LLC's and UK limited companies acting within an agency agreement that an audit trace on finances is almost impossible to regluate. Cost caps have been muted and talked about for so many years, it's laughable. They never work and they never will.

[EthanM]

There are so many ways that you can set up company structures using LLP's, LLC's and UK limited companies acting within an agency agreement that an audit trace on finances is almost impossible to regluate. Cost caps have been muted and talked about for so many years, it's laughable. They never work and they never will.

 

you dont even need a web. Use Red Bull, or Santander, Or Petronas or whatever. What's the FIA gonna do? Audit Santander to see if it's paying I don't know Magneti Marelli money for parts Ferrari uses?

[Nemo1965]

Ceterum autem censeo Carthaginem esse delendam. More important is that the tv money is divided equally between the teams, with bonuses for points, wins and championships payed directly after the result. And a nice bonus for every year that a teams drives all the Grand Prix in a season.

[Fastcake]

you dont even need a web. Use Red Bull, or Santander, Or Petronas or whatever. What's the FIA gonna do? Audit Santander to see if it's paying I don't know Magneti Marelli money for parts Ferrari uses?

 

If each part has to be accounted for, and detailed accounts provided to the FIA's auditors, the costs will be revealed somewhere. Not to mention there could be potential problems for those companies if they start assisting racing teams violate the regulations. If the FIA get a proper accounting firm to police the cap, and not attempt to run it by themselves, it would be a lot more effective than some people think.

[Laura23]

Good. I always thought caps were too expensive... I mean it's about £30 for a top team these days. Ridiculous. I look forward to the new budget cap.



Oh. It isn't that kind of cap. Oh well.

[metz]

A cost cap is impossible to police in F1, unless they force every team to use off-the-shelf components. 

 

How much does it cost a Ferrari custom made nut made by its F1 team? And how much if it is made by its road car division? And if they order it to a provider that also supplies pieces for their road cars?

 

And if Red Bull uses an advanced material developed for another series, what part of the development costs should be input to the F1 program?

 

Even in the fairest of worlds a cost cap would only operate approximativerly. In F1 it would never be operative. 

It never worked because they didn't want it to work.

They only said they would introduce it to keep some teams in the sport.

Loopholes and the RRA are a joke.

Times have changed and now even top teams are under fire from their owners to curb the expense.

Max's idea would have worked, and could still work today.

1...Establish an absolute top limit that nobody can exceed

2...Let all teams spend it on what they like within this limit

3...Assign independent FIA auditors to operate inside every team to assure compliance

4...Establish and account for all goods and services received from partners or sister/parent companies at "Fair Market Value"

5...Include ALL costs in the calculation

[Amphicar]

As others have pointed out, all that has been agreed is the principle of a cost cap. The devil will be in the detail of trying to translate that principle into workable, enforceable practice and setting a cap that would actually achieve anything. Plenty of scope for delay and obstruction in that process. Even if a theoretically workable cap is put in place, the big teams will simply see it as one more rule to be overcome, bent or ignored. Professional sport is all about achieving the unfair advantage. In many cases that advantage is achieved through drugs but in F1 it is achieved through money. Just as Red Bull employ better aerodynamicists than the FIA and consequently play fast and loose with the F1 Technical Regs so the top teams will employ better accountants than the FIA and outsmart any attempts to enforce a cap. It will be comparable to the way firms like Google and Amazon have made a monkey out of HM Treasury over taxation.

[Fastcake]

I was thinking about trying to compare a budget cap and tax avoidance as it happens. I think though there are two crucial differences. The principal behind tax avoidance is to move money into a lox tax jurisdiction, but in this case the money will have to remain within the country, and will appear somewhere in salaries, supplier payments, etc.

Secondly and perhaps the most important, the FIA has the power, should they choose to use it, to decide who can continue competing in F1. Unlike Her Majesty's Revenue and Customs, who have to sit by and watch, the FIA could throw someone out the championship if they find a way to contravene the budge cap.

[billm99uk]

There's a lot more to tax avoidance than just moving it all to low tax environments (hey, I'm an accountant I should know that!) but just taking it as an example, how are you going to tell a widget maker what price to sell their widgets to an F1 team? If it's a readily available market item then its easy, you can take the wholesale or retail price. But F1 components are generally one-off items with little or no commercial market outside F1? Use cost, or cost plus a percentage? Maybe, but those are pretty easily rig-gable, if you particularly want to (how do you allocate labour costs, for example?). Seems a complete nightmare - even with full access to the books. Auditors have enough trouble doing this in normal companies. In companies with such a massive incentive to hide stuff... Sure the FIA can chuck them out but then you have the problem of essentially arbitrary authority. How bad is bad enough to get you thrown out? And would the FIA really throw, say, Ferrari out? What's the difference between actually "breaking" a rule and merely finding a clever way around it? The only thing I can see being really effective is the staff count. And these days, with more and more people "working from home", less and less so. You might be able to regulate the number of staff actually at races, since the FIA hands out passes, but that's about it.

[Fastcake]

Hey I'm certainly no expert in this, so I defer to your knowledge on the details. But as I earlier said, any plan is dependent on the FIA exercising their authority no matter what methods the teams use to try and circumventing. They can moan about unfair treatment, but let's face it they should be used to arbitrary punishments being handed down by now. 

[KWSN - DSM]

In the world as a whole most Multi National companies manage to pay the tax they feel like paying, I have little doubt that the F1 teams will be equally smart if they have to live up to a budget cap.

 

[billm99uk]

I think some people here seem to think auditors are financial policeman (and infallible and omnipresent ones at that) but, in truth, that's not really their role. Auditors don't generally discover company fraud - that's more for whistle blowers or whomever is actually being defrauded to call them on. They're just there to certify that the companies books look like they're in a reasonable state. If you really want to hide something (for the record, I don't!) it wouldn't be difficult. Might come out in the long run, but are you going to, say, throw McLaren out of the 2024 championship for something they (i.e. some employee who left for another team years ago) did in 2014?

[Timstr11]

The budget cap must be given a fair chance to see if it works. Doing nothing is not an option.

There will likely be a sliding scale of a couple of year to bring the cap down to a sustainable level.

 

What excites me about the cap is that it will likely go hand-in hand with a relaxation of technical rules.

This should lead to different teams adopting different technical solutions within the capped budget.

Edited by Timstr11, 12 December 2013 - 12:10.

[Anderis]

Yes. The very good side of cost cap is that you no longer need any limitations that are there to keep costs at reasonable level. You can get rid of any testing, wind tunnel usage etc. limitations. Anybody can spend their money as they want since they are unable to force others into the troubles by outspending them by big margin. You can also go further with implementing new technical rules, changes in construction of the car, to improve racing, since teams can no longer moan that radical changes in car's design would be too expensive.

[noikeee]

who says it wouldn't be noticed? Renault trades engines for naming rights, Red Bull racing gets engines, Red Bull GMBH buys ad space on Renault cars. You will ban b2b?

 

That's actually a pretty good point. I can see people "cheating" very visibly through loopholes and then bringing all sorts of political arguing to the arena to cover it up in a very blatant way, pushing the regulations as far as they can into a lot of grey areas. Isn't that what they do with the car design already, why not apply that logic to financial management as well?

 

I still want to see how a cost cap turns out, though. Let's give it a try and see if it works, if it somehow does the benefits are obvious.

[metz]

Max's idea of "fair market value" eliminates these loopholes.

[CrucialXtreme]

It will be interesting to see how the proposed cost cap plays out. In 2012 Red Bull had the highest/largest budget in F1. Mercedes had the second highest budget and Ferrari had the 3rd. Ross Brawn said a few days ago Mercedes upping its budget to second highest in 2012 is why they could come in 2nd in the WCC.
RB who spends more than any other team isn't going to want to limit the amount of money they spend because they know it will affect performance.

[billm99uk]

Max's idea of "fair market value" eliminates these loopholes.

 

Only works if there's an active market for the product. As I pointed out above, that's just not going to be true in a majority of cases for F1 parts where they are "one-off" specialist items. Costing is more of an art than a science and you're inevitably going to get the same kind of "boundary-pushing" you see in aerodynamics. Everybody will be looking for the financial "double diffuser" 

[metz]

Of course there will be boundary-pushing, but overall it will be the closest we can get.

Asking the teams to be reasonable will be easier than asking them to be fair.

Every body knows that it can not be policed 100%.

If they want to try to make it work, fair-market value and internal FIA cost auditors are mandatory.

And NO loopholes or exemptions.

 

If it was easy they would have done it long ago.

[billm99uk]

"Fair-market value" doesn't really exist though, if there are no active markets for the items or services being sold. I have to try and do this stuff myself in my work and frankly its what we refer to technically as a "finger in the air job". You're basically just guessing. Auditors have no grounds to dispute it because they're just guessing too. 

[KnucklesAgain]

Max's idea of "fair market value" eliminates these loopholes.

 

How do you assess the market value of things for which there is no market? It's like assessing the going rate for the Mona Lisa.

[Tsarwash]

I suspect this is just the beginning of a long journey, and there will not be an effective cost cap for at least five years or so. I don't expect a cost cap to work for at least a few years after it is introduced. But very much a step in the right direction if you ask me.

[ollebompa]

I been thinking about this a bit. Do you think the cost of upgrading facilities will be part of the buget as it would make expanding your program impossible? Like Caterham wanting to build their own windtunnel for example.

If a team then have funds to spent more then the limit they will just put them in getting more out of their CFD and windtunnel runs aswell as different manafacturing processes. I imagine teams putting hunderds of millions in advaneced test rigs  and such.

Edited by ollebompa, 07 March 2014 - 19:54.

[SanDiegoGo]

The cost cap can only work if it is enforced. The FIA are too weak to do it, so this is nothing more than a token gesture that will be circumvented in the same way the RRA was made moot. Unless the FIA are willing to police and punish it's never going to happen.

[itsademo]

Yay! Now accountants can have fun finding technical loopholes as much as the aero guys! 

 

just look at how the UK financial industry loves screwing over the uk population to wonder exactly what is their limit

F1 teams like RBR make them look like innocents

[ollebompa]

http://www.autobild....pt-5056999.html

 

Cost cap seems to have been canceled.

Edited by ollebompa, 06 April 2014 - 10:59.