About the F1 Resource Restriction Agreement

[bhall]

[Engine and aerodynamic development costs] need to be controlled by proper rules with independant verification and robust sanctions.

In which alternate universe will Red Bull GmbH; Fiat S.p.A.; Daimler AG; the McLaren Group; the Renault-Nissan Alliance; Williams Grand Prix Engineering Limited/Williams Hybrid Systems; Mallya-Mol/Sahara India Pariwar; Caterham Cars; Marussia Motors; and Thesan Capital, all allow their ledgers to be subjected to the level of scrutiny required to root out breaches of a cost cap by their respective F1 teams?

Other details to consider: Arthur Andersen, Enron, Bernie Madoff, Lincoln Savings and Loan, Greece, etc.

[WhiteBlue]

Whitmarsh calls Bernie $250m budget plan unrealistic

Red Bull spends about $250m per season

Ecclestone is said to have proposed the $250m (£155m) figure as the initial level of the cap, but that immediately provoked disagreement among the team principals.

It sounds like quite a lot of money, so I don't know how much it's going to help too many teams. It becomes difficult to pin down and know everyone is comfortably operating within it. The budget cap by Bernie is everything - everything you spend money on, total cap. It has the elegance that you can describe it very quickly but it is very difficult then to find out where that money is and to control it. Bernie wants one that controls driver salaries and all those things. I think what we should be trying to do is ensure we are spending money in the appropriate places. I think we should be controlling excessive spend in development.

I think it is not going to work Bernie's way. Putting on a cap of the size of the biggest current budget isn't a sensible cap at all. Whitmarsh is right that you have to address the development spending race and Todt is correct in my view that chassis and engine development has to be addressed separately to get a grip on the manufacturer situation.

In which alternate universe will Red Bull GmbH; Fiat S.p.A.; Daimler AG; the McLaren Group; the Renault-Nissan Alliance; Williams Grand Prix Engineering Limited/Williams Hybrid Systems; Mallya-Mol/Sahara India Pariwar; Caterham Cars; Marussia Motors; and Thesan Capital, all allow their ledgers to be subjected to the level of scrutiny required to root out breaches of a cost cap by their respective F1 teams?

That point has been historically made by those parties that have an interest to prevent budget caps. There are many sensible people who have said that verification isn't such a problem as it is made to look. First you have to come up with sensible rules and definitions of what is allowed by what kind of entities. You have to isolate the companies that actually do the chassis and power train developments. And then you must make sure that other entities cannot transfer the items across the boundaries without attracting a severe penalty for doing it. You would be setting big fines in monetary and sporting terms for violations and rewards for whistle blowers. There is so much fluctuation between the top teams that you will always find a guy who will eventually tell his new team what was fishy at his old team. A team principal could not risk playing foul if he were to loose his license by sanctioning cheating on the restrictions. All the top people in the teams are now licensed by the FiA. They will not risk loosing their life in F1 for some temporary gain.

[bhall]

In which alternate universe will Red Bull GmbH; Fiat S.p.A.; Daimler AG; the McLaren Group; the Renault-Nissan Alliance; Williams Grand Prix Engineering Limited/Williams Hybrid Systems; Mallya-Mol/Sahara India Pariwar; Caterham Cars; Marussia Motors; and Thesan Capital, all allow their ledgers to be subjected to the level of scrutiny required to root out breaches of a cost cap by their respective F1 teams?

That point has been historically made by those parties that have an interest to prevent budget caps. There are many sensible people who have said that verification isn't such a problem as it is made to look. First you have to come up with sensible rules and definitions of what is allowed by what kind of entities. You have to isolate the companies that actually do the chassis and power train developments. And then you must make sure that other entities cannot transfer the items across the boundaries without attracting a severe penalty for doing it. You would be setting big fines in monetary and sporting terms for violations and rewards for whistle blowers. There is so much fluctuation between the top teams that you will always find a guy who will eventually tell his new team what was fishy at his old team. A team principal could not risk playing foul if he were to loose his license by sanctioning cheating on the restrictions. All the top people in the teams are now licensed by the FiA. They will not risk loosing their life in F1 for some temporary gain.

In other words, it's not a problem if it's not a problem?

I'd like to meet the sensible individual who can somehow stop Red Bull Racing from purchasing, for a nominal "fee," the intellectual property from Red Bull Technology it uses to build chassis. Once that happens, we'll need another sensible individual to stop the new Red Bull Technology Partners' sales of intellectual property to Red Bull Racing. Then someone will have to put a stop to Red Bull Technology Partners Ltd's sales of intellectual property to Red Bull Racing. It goes on and on and...

Corporations have spent generations flouting governmental rules regarding their business practices. They employ individuals, sometimes ironically called "Compliance Officers," whose sole job is to look for legal ways around those regulations. Now you tell me the FIA, an underfunded agency with absolutely no governmental authority whatsoever, can succeed where the U.S., E.U. and others have failed for years? You're dreaming.

Because the myriad rules and various methods of governance applied to large, multinational corporations will always offer a relatively easy way out, a budget cap in F1 can only work if 100% of entrants are in favor of a budget cap because they're wholeheartedly inclined to cap budgets for the sole sake of capping budgets. That's because a budget cap is an "honor system" and nothing more.

The only reason budgets have come down in the last few years is because technology has been capped. That's the only thing the FIA, FOM, or the Tooth Fairy can control. Everything else is an illusory shell game where only fools think they have control.

[Raptor22]

http://www.autosport.com/news/report.ph ... ostpopular


Looks like Bernie is now selling the idea of the budget cap but at a higher level

[sAx]

http://www.autosport.com/news/report.ph ... ostpopular


Looks like Bernie is now selling the idea of the budget cap but at a higher level

Guess if previous proposals of £30m typical ends up 3x that figure, then I would have thought Bernie's £155 million ($250 million USD) for 2014 should be £465M ($750 USD) after thee cap comes in!

[FoxHound]

But if it includes engines....Mercedes HPE costs around 50-80million per season, Ferrari around the same, the manufacturers will be forming an orderly line to leave F1.

If the manufacturers are having this included in their team budgets, as Red Bull have been bleating on about for some time, this would leave them with 70-100 million for the team proper.
Whereas Red Bull, recipients of a free Renault unit could carry on spending 155 million unabated. Again looking for the rules to caste in iron their already visible advantage over manufacturer based teams.

[WhiteBlue]

If the manufacturers are having this included in their team budgets, as Red Bull have been bleating on about for some time, this would leave them with 70-100 million for the team proper. Whereas Red Bull, recipients of a free Renault unit could carry on spending 155 million unabated.

It shows that Bernie is not shy of putting utter nonsense into the press instead of doing some sensible work. Todt has more sense.

[WhiteBlue]

Some published figures:
Source

Mercedes Will Increase Budget For Its F1 Team By 30%, $56M for '13 Campaign
After three more or less successful seasons in F1, Mercedes "reportedly plans to increase the budget of its F1 team by about 30% in '13," according to AUTO BILD. Newly appointed non-exec Chair of the team’s board of directors Niki Lauda "has reportedly convinced company management that success will only come with a little more budget for the Brackley, England-based team." Mercedes will reportedly increase the budget of its F1 team by £35M ($56.1M) or about 30%. According to the company's '11 business report, the revenue of the Mercedes F1 team was £114.9M. This number is considerably less than Red Bull's, for example. Red Bull spent a total of £392M with 45% of it for Red Bull Racing and the rest for Red Bull Technology. In '11, the Mercedes F1 team made a £10.6M loss before taxes (AUTO BILD, 11/4).

So Merc plans to go close to the $250 that will be allowed if Bernie gets his plan through. In the meantime I have had a bit more thought about the proposal.

One obvious conclusion from the last ten years of cost control is that you can never control cost by narrowing the technical spec. You have to introduce stringent and verifiable resource and/or budget control to keep the whole thing viable. What you want is separately limiting the development budget that teams can spend on their chassis and power train manufacturers can spend on their thing. You set up controlled legal entities for that purpose. That gets a big problem out of the way. You obviously have to limit the transfer sales price for power trains and engines accordingly so that the mid field teams remain viable. To keep the small teams afloat you simply introduce an equivalence formula with V8s.

The problem starts where you have hidden development organizations working in the core competencies of the controlled entities. I'm talking about aerodynamics for the teams and engine development for the manufacturers. When those companies start to transfer their result free of charge or under charged to the entities that are budget controlled then you must catch them. It is obviously a matter of stringent auditing and setting up suitable rewards for whistle blowers. There are always disgruntled team members. The risk of something getting out must be too high.

Today you have many tools to penalize or threaten a racing or manufacturing company into compliance. The directors have to apply for an FiA license. You can ban the directors if they have known about cheating. You can have severe sporting and financial penalties. As soon as you have the governing body at the driving wheel you will see people clean up their act very quickly. Bernie has told reporters in Abu Dhabi that he will offer $500k to all whistle blowers who report on cheating the budget.

One thing that you can never stop is personal transfer between different entities of manufacturers. So for instance a guy doing research for Ferrari's LeMans engines suddenly pops up at the F1 engine entity. That you cannot stop. The same can obviously happen at Mercedes, Honda, Porsche or any other manufacturer. It is something that will even out as soon as you have attracted enough manufacturers. And limiting budgets will obviously attract manufacturers faster than anything else.
I'm just privately chuckling at the idea of Baretzky getting a phone call by Piech ordering him to prop up the F1 project in Weissach. It would be something I would like to watch happening.

FiA, FOM and the teams need to act on this ASAP as Toto Wolff has confirmed. If you freeze it now at the amount which they are currently spending ($250m) and drive it down from there over several years you can prevent a bubble. That proposal btw is from Ross Brawn. Look at 2006 when they had budgets in excess of $400m. You definitely do not want them to go anywhere near that again. $250m for 2013 would be a good starting point but only if they agree to split it for 2014 and then drive it down as Brawn suggested in the following years. I would propose a plan such as this:

2013: teams $250m ; engines unlimited
2014: teams $180m ; engines $50m
2015: teams $150m ; engines $40m
2016: Teams $120m ; engines $35m
2015: Teams $100m ; engines $30m

I think at $130m p.a. there would be plenty of manufacturers coming back into F1. There would also bee more teams if you are sure that you can run it competitively at $100m.

[FoxHound]

In '11, the Mercedes F1 team made a £10.6M loss before taxes

So would it be correct to say then, that the total spend for the parent Daimler company was 10.6m before taxes?

[Richard]

IMHO Monetised limits will always be sham, there is an easy loophole by with R&D undertaken by parent group subsidiaries and suppliers.

The only practical way is to limit physical activities such as wind tunnels, size of race teams, volume of telemetry, track testing, etc.

However the biggest concern for the sport are the smaller teams. They struggle for survival and raising a budget limited by the RRA is a fantasy. So the best RRA measure would mandate help for them to compete within their budget, ie fixed price engine, gearbox and KERS supply from the big teams.

[WhiteBlue]

In '11, the Mercedes F1 team made a £10.6M loss before taxes

So would it be correct to say then, that the total spend for the parent Daimler company was 10.6m before taxes?

No, I don't think so. They would be spending another €80m on power trains in Brixworth.

[WhiteBlue]

IMHO Monetised limits will always be sham, there is an easy loophole by with R&D undertaken by parent group subsidiaries and suppliers.

The only practical way is to limit physical activities such as wind tunnels, size of race teams, volume of telemetry, track testing, etc.

However the biggest concern for the sport are the smaller teams. They struggle for survival and raising a budget limited by the RRA is a fantasy. So the best RRA measure would mandate help for them to compete within their budget, ie fixed price engine, gearbox and KERS supply from the big teams.

I respectfully disagee. If you require controlled legal entities for the activities you can catch the crook, at least as far as chassis (aerodynamics) are concerned. You only have to discover the secret facilities and you catch them. No other purpose exists for F1 aerodynamics.

If there is a bit of engine research going across the company limits of the F1 engine making companies it is not such a big problem with the right manufacturer set up. You obviously have to tailor make the system in a way that you get at least five to six manufacturers involved that all will supply the top teams like Ferrari, Red Bull, McLaren, Lotus and Mercedes. That isn't hard to imagine if they get the general approach right. Honda and Porsche are on the brink of jumping off the fence if the regulations are right. Hyundai and Aston Martin are also obvious candidates if the costs can be contained. Force India and Sauber will be in line to snap up works engines if they come in.

The mid field teams will have price limited customer engines in that scenario and the back markers will have V8s for one or two years to ease the transition. The big question is whether they manage to create sensible rules and drive it down from $250m+ that is currently spent. If you do not manage to do so you will get spiralling costs again and no manufacturers coming into F1.

[Richard]

I respectfully disagee. If you require controlled legal entities for the activities you can catch the crook, at least as far as chassis (aerodynamics) are concerned. You only have to discover the secret facilities and you catch them. No other purpose exists for F1 aerodynamics.

Sure, it'd be hard to hide a bunch of people doing F1 CFD, but the true cost of that CFD would be easy to hide. The F1 team would get the premises, software, workstations, servers, company cars, employee pensions, healthcare etc from the parent company at advantageous rates.

Then we might think about limiting the headcount of the CFD team because it is F1 specific and easy to identify. One loophole there is sponsoring a university to undertake research that matches the car concept such as coanda exhaust. For example McLaren's J damper was invented at Cambridge University. So perhaps we limit the fees going to external consultants (inc universities). Then the parent company would sponsor a university with scholarships, buildings, cheap computers and expensive professors. The F1 team would pay a pittance to cover student wages as "consultancy".

The university is a simple example, there are plenty of other examples of manipulating transfer costs between private companies to avoid tax. The same would apply to F1.

[FoxHound]

In '11, the Mercedes F1 team made a £10.6M loss before taxes

So would it be correct to say then, that the total spend for the parent Daimler company was 10.6m before taxes?

No, I don't think so. They would be spending another €80m on power trains in Brixworth.

Okay, but the team itself is costing Stuttgart 10 million, right?

[WhiteBlue]

Sure, it'd be hard to hide a bunch of people doing F1 CFD, but the true cost of that CFD would be easy to hide. The F1 team would get the premises, software, workstations, servers, company cars, employee pensions, healthcare etc from the parent company at advantageous rates.

Then we might think about limiting the headcount of the CFD team because it is F1 specific and easy to identify. One loophole there is sponsoring a university to undertake research, that "happens" to match the car concept such as coanda exhaust. For example McLaren's J damper was invented at Cambridge University. So perhaps we limit the fees going to external consultants (inc universities). Then the parent company would sponsor a university with scholarships, buildings, cheap computers and expensive professors. The F1 team would pay a pittance to cover student wages as "consultancy".

The university is a simple example, there are plenty of other examples of manipulating transfer costs between private companies to avoid tax. The same would apply to F1.

If they set up the right kind of auditing I'm pretty sure that no team principal in his right mind would contemplate it. It is just too bloody dangerous. Just look at the way Lance Armstrong has been publicly destroyed. You want to avoid such fiaskos if you have a nice job in F1. All leading guys will be FiA licensed and they surely would loose the license for life if they would intentionally cheat like Armstrong. Particularly if you think about your university scheme there would be way too many people who would want to cash in on $500k from Bernie for whistle blowing. You cannot hide the purpose of F1 aerodynamics, believe me. And there will always be disgruntled people or people out for the quick buck.