Formula One Cost Cap Q&A Why does Formula One need cost capping?
Formula One faces a period of great uncertainty during this harsh recessionary period. Funding a team is increasingly seen as a discretionary spend for the majority of team owners and sponsors. To ensure a healthy grid all are agreed that costs need to be cut.
Two main philosophies have emerged, either i) reduce activity levels through very restrictive technical rules, plus a degree of standardization if required; or ii) restrict the money that teams are allowed to spend (cost capping).
The FIA believes that unfettered technical competition is part of Formula One’s DNA, and would like to see this flourish, but in an environment of strong, responsible and innovative management, not a spending race. For these reasons cost capping is preferred.
What is covered by the cost cap?
Marketing and promotion – we want Formula One teams to look good and to entertain their partners. We want manufacturers to show off their cars at exhibitions and city centre displays, and we want teams and their sponsors to promote Formula One through inclusion in advertising campaigns.
Drivers and young driver programs – Formula One is the pinnacle of motor racing. Fundamental to this is attracting the world’s best drivers. Moreover we wish to encourage continued investment in young driver programs.
Engine costs – In order to attract manufacturer owned teams to take up the cost capping option, the FIA have decided to exclude engine costs for 2010 (only)
Furthermore, we are allowing manufacturers to honor existing supply arrangements, provided there is no element of subsidy that could have a cartel-like affect on the engine market.
How did the FIA arrive at the £40m figure?
We arrived at the figure by analyzing both revenues and costs in Formula One.
We know what the FOM (Formula One Management) revenue is likely to be in the future, and we have some understanding of realistic sponsorship revenues during the recession. Taken together, it’s possible to project total external revenues for all finishing positions in the Championship. At £40m we believe that 70 per cent of the grid can generate a profit. This transforms the business case for owning a Formula One team, for both manufacturers and private investors. The desired net result is to have a very healthy commercial environment for present and new owners.
We also had a good look at costs, and believe that £40m in combination with greater technical freedom will allow engineers to create Formula One cars even more interesting and exciting than today’s cars.
Will the £40m cap for 2010 be changed for future years?
As set out in the Regulations, the cap for future years will be decided by the FIA. In setting future years’ limits, the FIA will have regard to the progress of the project and the feedback from all stakeholders to the sport.
How does the FIA intend to police the cost cap?
Throughout the construction of the Regulations we have worked with expert forensic accountants.
The Regulations allow for the establishment of a Costs Commission to monitor and assist teams in complying with the Regulations. The Costs Commission will appoint auditors, and other financial experts as required, in order to do this.
A key factor is that all cost capped teams are businesses engaged in exactly the same activities and this enables consistent interpretation of the principles of the regulations. It is difficult to hide engineering activity or to falsify accounts consistently, given the traceability of transactions in today’s world and the access and inspection powers which the Costs Commission will have. The penalties for defrauding the FIA with regard to any willful transgression of any Regulation or any subversion of an investigation are well established.
Is a Costs Commission really needed?
The emphasis is on teams to demonstrate compliance, and to pro-actively seek clarification and interpretation of the Regulations. As the Cost Cap Regulations are new the FIA has decided to provide an appropriate resource, staffed with a small number of financial and technical experts, to deal with such issues, and to monitor compliance, such that the Regulations are effective.
Who pays for the Costs Commission, auditors and other experts, and doesn’t this just add costs, rather than removing them?
The cost capped teams will each pay an equal contribution to cover these costs. The costs involved will represent a tiny fraction of the costs saved in Formula One.
What is the penalty if a team exceeds the cost cap?
This depends on the case. The International Sporting Code covers transgressions in the same manner as for the technical or sporting regulations. There are no ‘fixed penalties’. The Cost Commission will judge the degree of misdemeanor and advise the FIA , who will determine any penalty.
What measures are there to prevent teams spending money this year on a car that will compete under cost cap in 2010?
The teams must demonstrate that they have adhered to the spirit of the regulations and spend no more than 50% of the value of the 2010 cap on the development of the 2010 car (in 2009). Furthermore, there are limits on the value of stock of car parts which can be carried into 2010.
How will you stop manufacturer backed teams from running hidden F1-related projects in their parent companies?
The question is actually asking ‘how will we stop manufacturer teams from cheating’. The principles of determining a fair market value for all activities which are undertaken for the benefit of a team (whether a manufacturer or not) are clearly set out in the Regulations.
No team would wish to be exposed as cheating, so we expect a healthy amount of self-policing. However, the rules are clear on this point, such activities must be declared and appropriately valued. Bear in mind the access that the costs commission and auditors have and their ability to compare reported costs across all cost capped teams.
Will teams be allowed to buy parts from other teams/manufacturers?
Yes, according to the FIA regulations, but one should bear in mind that contractual arrangements with the Commercial Rights Holder will place restrictions on such activities. Inter-team transactions are covered by the regulations.
How many teams do you expect to take up the budget option?
All those who wish to transform the commercial basis of participation for their owners and investors. The FIA believes that cost capping will prove attractive, and it hopes that over time all teams will join. So far, interest has been extraordinarily high from both existing teams and potential new entrants.
If a team decides not to become cost capped now, can it do so at a later date?
Yes, a team will be able to opt to become cost capped in advance of each year of its participation in the Championship.
Are you worried that F1 will effectively become a two-tier championship?
There is one set of Technical Regulations and as always there are choices for all teams as to how they decide to attack the Championships.
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