The world of the budget-cap
Honda F1 website
Honda website

JANUARY 14, 2008

The world of the budget-cap

Most of the Formula 1 teams are quite happy with the idea of capping their budgets. This makes considerable sense in the current economic climate with the car companies worrying about the cost of potential fines from the European Union if they do not make their cars more environmentally friendly by 2012. This will mean that in the next five years all available resources will be directed towards development programmes to meet new emissions standards - and that is a threat to F1 stability as some firms may conclude that F1 is not as important as fixing environmental problems.

According to reports in Germany the only people objecting to the idea is Scuderia Ferrari Marlboro which seems to prefer the concept of having restrictions on windtunnels and FIA interventions to see what teams are doing. There are many problems with this, not least basic human rights issues about whether or not the FIA should be given the right to enter premises at will.

The suggestion that teams should be allowed to spend no more than $150m is one that until recently was a source of mirth in F1 circles. These days, however, modern accounting techniques developed in the wake of Sarbanes Oxley legislation in the United States are now highly advanced with all manner of policing to ensure that public companies are properly regulated. In the European Union, where all the current F1 teams are based, listed companies have to adhere to International Financial Reporting Standards (IFRS). While many of the F1 teams are privately-owned there is no reason why the FIA could not demand similar accounting standards, particularly if the teams voluntarily agree to accept them. The policing of such systems would be largely done by the rivals which would keep a close eye on what their competitors are doing and would report any perceived infractions to the FIA.

Being found to be cheating on the numbers would be a disaster for any of the big corporations involved in F1 as these firms thrive on their transparency and corporate governance to make sure that their shareholders are happy.

Policing is not therefore the problem and one must conclude that Ferrari's opposition to the idea is rather more partisan by nature, which is not altogether surprising. The team has long enjoyed a special deal with Formula One Management, which means that it is paid far more than the other teams, on the basis that Ferrari is more important to the sport than a Force India or a Williams F1. This may make sense from a commercial point of view, to ensure that Ferrari does not run off and do a deal with a rival championship, but the reality is that Ferrari last year took the bonus money AND signed a long-term deal to supply cars to the A1GP Series, the nearest thing that F1 has to a rival. It was a move that did not impress other teams and cannot have gone down very well with FOM.

While a budget cap would mean that Ferrari could go on collecting money from FOM and its sponsors, it would not be allowed to spend all of that money in F1 and would thus be in a similar situation to everyone else. This is clearly not a position in which Ferrari wishes to be. The team has only one windtunnel and clearly does not want to have to invest in another in order to stay competitive. Building a new windtunnel is quite expensive, with a price tag of around $50m, but this cost can be written down over a 10-year period and with an operating cost of about $3m a year - according to Toyota, which currently runs two windtunnels around the clock - it is much more cost-effective than paying drivers the vast sums they demand these days.

Other stories for JANUARY 14, 2008