Will a Budget cap work?

The idea of a budget cap has been thrown around for several years and initially championed by former Jaguar Racing team principal Tony Purnell. In January, FIA president Max Mosley stated, "starting in 2009, there will be a cap on expenditure for all Formula One costs other than engines, drivers and expenditure exclusively for promotion and marketing." So with those words and the backing of the teams Formula One will have budget caps next season, but the exact details of how everything will work is still being figured out. The initial questions in regards to this cap are how much will teams be allowed to spend and on what? The proposed cap figures from the FIA and the FIA consultant Tony Purnell, one of the original backers of the idea, is as follows:

250 million USD for 2009 , approximately 200 million by 2010, and approximately 156 million in 2011. The proposed cap would not cover expenditures on engines, the new KERS, marketing costs or driver and team principal salaries. Although there seems to be no issues on what is not being capped, the reactions by team principals to the proposed cap figures have been mixed. Honda Racing CEO, Nick Fry has said, "next year's figures are workable, but Honda is a little concerned about the glide-path, which needs more discussion. By pushing the number too low, we may not only attract marginal operations but also alienate those at the top who want to develop high technology." Renault team principal, Flavio Briatore said "I already pay 40% less than the cap. If I want to keep to the limit then I need to spend more. It's nonsense." Although, this is before he publicly declared yesterday that Renault had increased their F1 budget by 30-40% amidst difficult economic conditions.

As an American that enjoys the National Football League and likes how the NFL manages their salary cap structure, I do wonder about the feasibility and impact of a cap in Formula One. In the NFL, there are 32 teams and each team is allowed to spend a fixed amount on player salaries. In 2008, the figure is 116 million USD; player salaries are the most expensive line item in a team's budget. Also, team owners can spend whatever they want in areas like marketing, investments, stadium infrastructure, etc. Moreover, the NFL shares its TV revenue equally. This helps to keep small market teams (Green Bay Packers, Jacksonville Jaguars) financially competitive with its bigger market brothers (New York Giants, New England Patriots).

In recent years the FIA has instituted a number of restrictions with the aim of reducing costs and keeping the independent teams alive and competitive (currently teams like Williams, Red Bull and Force India). The costs of operating a team are so high because car manufacturers have vast resources that squeeze out independent teams. The FIA has done what the NFL has done by putting restrictions on the most expensive line item, engines and engine development as well as restricting testing which has its pros and cons. In addition to testing and engines, the FIA have reduced the number of cars you can bring to the race, they have implemented a standard electronic control unit and they contracted a single tire supplier. Nevertheless, these measures help the smaller teams to a degree and have had only marginal success in controlling costs. Bigger teams would just shift expenses to other areas of development; for example investing heavily in building or acquiring wind tunnels, supercomputers and developing lubricant technology.

If Formua One is to have an effective cap system there has to be better revenue sharing. In F1, there is not a TV revenue sharing deal like the NFL's. F1's commercial aspects are governed by the Concorde Agreement which is a contract between the FIA, the Formula One teams and Formula One Administration. It dictates the terms by which the teams compete in races and take their share of the television revenues and prize money. This money is divided on a sliding scale. If the sport wanted to really save independent teams as well as control costs more effectively, they would give smaller teams an equal share of the TV money to help supplement team budgets. This current proposal is designed to regulate budgets in a way that can impact the livelihood of what amounts to the "working class" of F1; designers, engineers, factory staff, etc., particularly since the cap proposal is not a stable figure or one that incrementally increases; again it decreases and decreases drastically. It is a 42% decline in the budget cap figure in 2009 to 2011. Toyota's team president John Howett: "The one issue is how low the FIA wants it to go over time and the impact on people's livelihoods. That's the biggest concern I have." This proposal does not effect team principals or drivers as they can get paid whatever the team chooses, but some talented aerodynamacist who has more impact on the car has his salary capped. This is where there is another difference. In the NFL, the players (F1 equivalent would be drivers) have their salaries capped. Now, would it be more interesting if Ferrari did not manage their budget correctly and Sebastian Vettel became a "free agent"; and because BMW or Toyota managed their budget wisely they have the opportunity to get Vettel? I think that would be more interesting than having to worry about letting go some talented engineer for some second rate engineer because his or her salary puts a team over the budget cap.

In any event, it would not be the first time that FIA president Max Mosley let little fish die off. In late 2006, as a result of the engine development freeze, long time engine supplier Cosworth had to lay off 150 employees (40% of the staff). Mosley's comments at the time were, "there are bound to be redundancies. If you employ 1,000 people to put two cars on the grid 19 times a year, and you can do the same thing with 200 people, at the same level, well then, those 800 people, haven't got a job." This causality was a result of just an engine freeze on development. If the proposal goes in as planned, what causalities will there be for an aerodynamacist or engineer for a mid-level team like Red Bull? It would certainly hurt their competitiveness. Sharing the TV revenue equally would at least give teams an equal starting point of competitiveness, then the differences of better team management and getting/developing driving and engineering talent comes more into play as opposed to 2 teams simply fighting for the same sponsorship dollars.

So, as 2009 comes closer we will see what the final proposal will look like and see if it will help the independent teams and control costs effectively and keep F1 sustainable.