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F1 2022

Analysis: Is there any substance to the current cost cap controversy?

Rumours that Red Bull and Aston Martin have breached F1's budget cap have led to questions over what sanctions offending teams may be subject to. But actually allocating value to F1 teams and their assets is no easy task, as RacingNews365 Editorial Director Dieter Rencken explains.

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To news overview © XPBimages

Formula 1 is a win-at-all costs activity - unless, that is, costs are capped by the FIA's Financial Regulations, initially introduced for 2021 at $175m but reduced by $30m at the height of the Covid crisis, with further drops of $5m per annum for 2022/3 respectively.

Crucially, said cap exclude activities such as marketing and hospitality, top three executive salaries, heritage programmes, travel costs, administrative formalities, and driver retainers. Thus, in broad-brush terms, they apply to competition activities such as design, development, construction and operation of two cars for all events during a season, plus sanctioned testing. Allowances are provided for tyre tests and sprints.

All teams are required to submit audited financials to the FIA by March 31 each year, with the governing body correlating and cross-checking the data. Penalties range from reprimands and metaphorical slaps on the wrist through points docking in both championships to outright exclusion from the championship. Thus, the stakes are high.

However. given the tightness of the cap, the top three teams - all of whom previously competed on operating budgets of well over double the cap - were bound to find the enforced reductions tough to live with. Equally, they did not wish to retrench swathes of highly qualified and loyal staff lest they later had later reason(s) to call on their services. The key to such dilemmas is retain the heads by (temporarily) deploying them elsewhere.

Spend on regulated items comprises three main areas: in-house manufacture; payroll for design, production and operational staff; and out-sourcing, whether for labour, goods, or services. The tricky bit is allocating values to buy-outs, particularly if (out-)sourced from group companies or associate entities: Who decrees that chassis are worth $200k or $2m or front wings $5k or multiples of that?

To resolve this conundrum the regulations include a definition of 'fair value' in their 20 (of 54) pages, namely: "[It] means the price that would have been received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the transaction date." Are you any the wiser? No, and neither are most in the paddock despite their regular declarations to the contrary.

Therein exists a potential loophole large enough to drive an F1 truck through - sideways, at that - and the root of much of the argy-bargy over who (over)spent what and where and how. Consider: various teams have supply agreements with others, some bilateral, some trilateral; others have sister or associate teams. Haas doesn't even have a factory in the accepted sense, relying predominantly on 'fair value' and outsourcing transactions.

			© XPBimages
	© XPBimages

Allocating value to teams

Red Bull Racing, the drinks company's actual "F1 team" as defined, reported just 59 employees in its last filed financial reports (2020), depending primarily on Red Bull Technology (934 heads) for supplies of engineering services and componentry. Combining the turnovers of the two entities does not readily resolve the issue, either: RBT also supplies sister team AlphaTauri and undertakes contract work for outsiders.

Ferrari supplies complete 'back ends' - comprising power units, gearboxes, hydraulics, electronics and various suspension bits bolted to gearbox casings - to Sauber and Haas, while Williams has a similar deal with Mercedes. Aston Martin has access to the Three-Pointed Star's 'menu' of unlisted parts, namely those that may be freely outsourced.

Indeed, about the only teams that produce major components in-house for their own entries are McLaren and Alpine. The former outsources Mercedes power units but does the rest (mainly) in-house, while the latter has no PU or gearbox customers or allied entities - but not by design, as negotiations with Andretti Group attest. The rest of teams have symbiotic relationships - some on multi bases - with others to greater or lesser degrees.

All teams outsource items such as brake parts, fuel tanks and electronics/hydraulics, yet not necessarily to the same specifications or levels of complexity so values may vary. Then there are 'barter' partnerships - so-called 'Exchange Transactions' - in which materials, goods and services are traded with suppliers without cash changing hands. Others have OEM-linked contracts, being dependent on deals with patent entities.

Now consider the mountain of paperwork that faces the FIA: Not only does the governing body need to trawl through the submissions of all ten teams, but needs to cross-check buyouts, fair values, veracity of any exclusions, and, above, the payrolls for staff levels varying from around 250 (Haas) to over 1000 heads for Mercedes, Ferrari and the combined Red Bull entities respectively.

Against this background, it is little wonder that as the FIA reports for the first reporting period - namely for that most contentious 2021 season - draw to a close, accusations of 'cheating' dressed up as minor or major breaches are flung in various directions, usually at those ahead of the accuser.

It happens regularly with technical and sporting matters, so why not with cost caps, which by the nature of the discipline potentially have many more 'grey' areas than fixed units such as weight, length or time.

True, the FIA, working in conjunction with F1 and finance chiefs from all teams plus a host of consultants, toiled exceptionally hard to cover all areas, but the reality is that F1 is all about seeking unfair (but legal) advantages, and that does not change simply because a bunch of grey-suited bean counters have drawn up a formal financial framework. If anything, the challenge becomes one of beating them at their own game…

			© XPBimages
	© XPBimages

Team bosses weigh in on overspend rumours

Ferrari’s Laurent Mekies on Friday told Sky Italia, "It's now no secret that two teams broke the 2021 budget cap regulations, one by a significant amount, the other less so." He is believed to be referring to Red Bull Racing and Aston Martin – crucially, both teams with significant buyout ledgers.

He certainly had a point when he said, "Putting penalties to one side, the important aspect is that the FIA can establish that there has been an overspend. Once that has been done, at least then we have confirmation that these are the rules everyone must abide by.

"After that, the subject of penalties can be discussed in light of the effect of the overspend in 2021, in 2022 and what it will be in 2023, because obviously, at the current time and the point in this season in which we find ourselves, there is also an effect on next season."

Equally, when Christian Horner, says, "I'm certainly not aware of any breaches…our submission was below the cap and it’s down to the FIA to follow their process, which they are doing," how can his words be contradicted without access to all the paperwork, which is highly confidential (for obvious reasons) and only accessible by the FIA and it’s Cost Cap Adjudication Panel.

That said, the governing body late on Friday evening issued the following statement: "The FIA is currently finalising the assessment of the 2021 financial data submitted by all Formula 1 teams. Alleged breaches of the Financial Regulations, if any, will be dealt with according to the formal process set out in the regulations.

The FIA notes significant and unsubstantiated speculation and conjecture in relation to this matter, and reiterates that the assessment is ongoing and due process will be followed without consideration to any external discussion."

Regardless, the main issue is, though, of sanctions: Assume that 12 months after last year's contentious finale, one or other team(s) - regardless of final classification - is deemed in major breach of the cap, what then? Rewrite history books? Seize silverware? Instruct perpetrator(s) to retrospectively withdraw bragging rights? Fine teams owned by billion-dollar entities? Exclude them and face legal challenges?

Ultimately there are three possible outcomes: All teams are not only deemed to have operated totally within the cost cap and end of story; one or other team(s) committed a minor or major breach and should be treated accordingly; and the regulations are worded sufficiently loosely to facilitate loophole illegality, in which case the FIA, F1 and all teams are complicit after having jointly framed and agreed all clauses.

Until then any speculation is just that…

Also interesting:

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With confusion reigning for several hours over Max Verstappen's starting position for the Italian Grand Prix, does F1's grid penalty system need revising, and should there be a rule preventing races from ending under the Safety Car?

RacingNews365.com F1 journalists Dieter Rencken and Michael Butterworth discuss the key issues from the Italian Grand Prix.

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