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The 1.4bn exemptions to the budget cap

NEWS STORY
07/11/2019

Twenty four hours after F1 unveiled its proposed regulations for 2021 and beyond, Claire Williams was among the most vocal in terms of welcoming the package.

In particular she welcomed the budget cap, in many ways the cornerstone of the sport's plans to level the playing field and thereby improve the quality of the racing.

Over the years the sport has sought without success to curb spending by means of introducing a spending cap, almost breaking apart when Max Mosley attempted to make such a move.

However, despite the assurances from Chase, Ross and Jean, one has to wonder if the proposed cap will actually make any difference.

As ever, the devil is in the detail.

As we are all aware, the budget cap is $175m (135.8m) and will be strictly enforced, with Ross Brawn insisting that teams that try to beat the system will face draconian punishment, we're talking exclusion from the championship seemingly.

While it has previously been revealed that certain costs will be excluded from the $175m, it is only when one looks in more detail that doubts arise.

According to the financial regulations released on Thursday, the following are exempt:

Engine development and production

Driver pay, travel and accommodation costs (including test and development drivers)

Pay, travel and accommodation costs for the three highest paid employees

Employee bonuses up to the lower of 20% of total remuneration or $10m (7.8m)

Marketing

Flight and hotel costs for competition or testing

World championship entry fees

Super license fees

Fees paid to the Commercial Rights Holder or the FIA upon signing an agreement to participate in the championship

Property costs

Heritage activities

Development of alternative fuel or oil for use in the Power Unit

Finance costs

Finance activities

Legal activities

Corporation tax

Financial penalties for breaching the Financial Regulations

Depreciation, amortisation, impairment loss, and costs arising from the revaluation or disposal of assets

Foreign exchange gains and losses

Human resources

Social security costs which exceed 15% of the total remuneration

Employee termination costs during the transition period

Non-F1 activities

Currently, the average annual spend of the ten F1 teams is $312m (242m), according to Formula Money, and while some spend considerably more, others spend considerably less.

The $175m cap is a 43.9% reduction on that current average.

The single biggest cost across the whole of the sport is the power unit, with the four engine manufacturers thought to be spending $980m (761m) in total each year. However, the teams, even the likes of Mercedes, Renault and Ferrari which build their own engines only have to declare a maximum of $16.7m (12.9m) a year.

According to Forbes, the teams are currently spending around $1.8bn (1.4bn) on those areas that are exempt under the cap, which is around 58% of their costs. In other words, the unlimited areas of spending exceed the limited areas.

In 2009, in a bid to end the spending war, the teams, under the guise of the Formula One Teams Association (FOTA), came up with the Resource Restriction Agreement (RRA).

Amongst themselves, and not part of the governing body's official regulations, the teams agreed to a sweeping number of changes that would place strict limits on various aspects of the sport, amongst other things limiting budgets, staffing and resources.

However, it wasn't long before the finger of suspicion was being pointed, with Red Bull accused of breaking the agreement by going over its budget, a claim Christian Horner vehemently denied.

In 2016, Ferrari chairman, Sergio Marchionne said that "the interventions there have been up to now, from limitations on the cost of supplying power units to the reduction of wind-tunnel hours, have been totally ineffective.

"This is the old problem for all those who try and impose limits on car development," he admitted, "if areas are left open, spending concentrates in this area.

"If I look at the last four of five years, we haven't saved a euro. We have simply redistributed our spending to other areas. In principle it's very noble, but then the effect never gives the necessary results.

"When I look at old reports of what we have spent in the last ten years, and even further back, I deduce that Ferrari has never held back when it comes to spending," he concluded.

While the RRA was self-policed, the 2021 budget cap will be overseen by the FIA, and the legislation released on Friday reveals that, among other thangs, its can enter teams' offices and grant immunity to whistle-blowers.

While, speaking on Thursday at the presentation, Jean Todt was clearly enthusiastic, however this wasn't the case as recently as July, when he admitted that "only three teams will be affected or will have to restrict themselves" as a result of the cap.

"It would be better to have a limit that gives all the teams the same chance, but that was not possible," he added.

Indeed, looking just that little bit harder, despite all the smiles and claims that the rules have been "unanimously agreed", the official F1 website reveals that "the 2021 rules are a watershed for Formula 1 - but they are still a work in progress", while the FIA's website refers to the agreed terms as being a "framework".

If this all sounds a little up in the air, let's not forget that, as yet, not one of the teams has signed up to race beyond 2020 when their current contracts end, with F1's latest annual report, which was released at the end of February, admitting that "Formula 1 cannot provide assurance that any of the Teams will commit to participate in the World Championship beyond 2020."

Speaking in Austin, it was clear that there remains some way to go.

"We just voted the new set of regulations but the entire Concorde Agreement needs to be discussed and agreed and signed," admitted Mattia Binotto, "that's on the commercial button, the governance as well.

"Working group have been set, to start discussing the details of the documents," he added. "I think it's only after having seen the details that we may assess where we are and what's required."

"I don't expect any major renegotiations of Concorde terms, what's been proposed, because that's something also that's part of the discussion of the whole package," sais Cyril Abiteboul, "even though it's not been signed up so anyone is free to sign or not to sign but clearly I expect that the details of the drafting of the document to take much longer - we all know that when one lawyer gets involved so at least we have twelve lawyers. So that's going to take a bit of time probably to get a grid."

Between them the teams receive 68% of the sport's underlying profits, which came to $913m last year, and each of them spends every single penny they receive in their quest for success.

It is the core spend, spend, spend mentality of the teams that is the issue, and it has nothing to do with the size of their budgets.

Until this is addressed there will continue to be the haves and have nots, and courtesy of the exemptions - note that financial penalties for breaching the financial regulations are themselves exempt from the budget cap - what they cannot spend here they will simply spend there, and in time we are likely to see more teams go under as such an attitude is simply not sustainable.

Essentially, what was presented last Thursday was RRA2, albeit to be policed by the FIA.

The 2021 financial regulations in full, can be found here (Pdf)

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READERS COMMENTS

 

1. Posted by imejl99, 08/11/2019 13:10

"The teams received a "draft" of the new Concorde document on the last week in October.
Smoke and mirrors followed..."

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2. Posted by CL, 08/11/2019 11:42

"So basically, car development is restricted but all of the business operations of the F1 team aren’t. That kind-of makes sense. There’s only so much you can spend on accountants, buildings and admin, while trying to restrict marketing would be futile.

Engine / power unit development is the most relevant to the real world so I can see why manufacturers would want to continue to spend there, while having manageable supply agreements for the customer teams who all benefit from the spending. This feels like they are heading in the right direction...hopefully it will give the midfield a chance to catch up in 3 - 4 years."

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3. Posted by Wokingchap, 08/11/2019 11:12

"Ridiculous...utterly .... imo."

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4. Posted by Lakota, 07/11/2019 14:22

"r u kidding me????"

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5. Posted by Greg, 07/11/2019 12:11

"And the exceptions keep coming. So much for a cap"

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