Written by Daksh Hemnani*
Introduction
Formula 1 introduced their first set of financial regulations that imposes a budget cap of $145 million on the team for limiting their spending in the season of 2021. The aim of the budget cap is to deliver a more competitive-balanced championship and ensure the financial sustainability of the 10 F1 teams.[1] But as with any other revolutionary regulation, this budget cap as well has faced some criticism as it has been argued that the regulation would not be able to achieve its targets but will serve as an invitation for the teams to cheat.
What is a Budget Cap?
The concept of a budget cap has been in talks since 2013 where teams have discussed at length the details and limitations of the cap. Earlier the cap was supposed to be around $175m but due to the Covid-19 pandemic, the teams were forced to renegotiate the cap and as a result, was reduced to $145m for the 2021 season. The cap will decrease gradually in the following seasons from dropping to $140m in 2022, and then $135m for 2023–25.[2] The cap only covers the expenses made to improve a car’s performance, it excludes all costs relating to marketing, cost of drivers salaries and costs of a team’s three highest-paid personnel’s. Further, it also excludes the cost of maternity and paternity leave as well as sick leave, plus the costs of medical benefits provided to team employees[3]. These have been excluded to ensure that the teams are not motivated to cut the costs in such areas.
The agreement also introduces a new concept which gives the team an increased allowance for aerodynamic research[4] and development on a sliding scale basis in the favour of the teams finishing at lower positions in the championship.[5] All these changes have been made to ensure a level playing field for all the teams and improve the competition in the championship which will make the sport more exciting and would also help the championship to get more viewers.
Was it really necessary to introduce a budget cap?
The introduction of the budget cap has been subjected to various criticisms and many people have polarizing views regarding this regulation. The cap was in discussion for many years, however, it has been facing resistance from big teams like Mercedes, Redbull and Ferrari.
The main objective of the cost cap is to level the playing field and increase competition within the sport. We can see the need for increased competition by looking at the fact that Mercedes won 7 consecutive titles and in the last 10 years only 2 teams have managed to win a title.[6] The main reason behind the big 3 teams i.e. Mercedes, Red Bull and Ferrari seem to be unbeatable and the reason behind why there has virtually no change in the top finishing position in the sport is because of the huge amount of money they spend, the resources that they have, cannot be matched by other teams.
Mercedes and Ferrari employ around 1000 people and spend approximately around 500-600 million dollars each season. Red Bull employs around 700 people and spent 400 million dollars in the 2017-2018 season.[7] How can we, then realistically expect a team like a Williams or a Haas which employs only 200-300 people and do not even spend more than 150 million dollars per season to beat Mercedes or Red Bull and win a championship or finish on the podium.
Alpine’s team principal Laurent Rossi said in an interview that without a budget cap they are “almost doomed to stay in the midfield.”[8] And Haas’s team principal Guenther Steiner believes that without a budget cap their team would not have survived in the sport. Statements like these by the teams in the lower part of the midfield and the expenditure and success of the big teams seem to make a strong case for the budget cap.
Another aim of the budget cap is to promote sustainability. It is believed by the FIA ( Fédération Internationale de l’Automobile- Formula 1’s governing body) that a tight cost cap would force the teams to make sustainable choices and would stop the teams from spending recklessly.
An example of this can be seen in the decision made by McLaren’s Team. Usually, a team would produce a single set of garage equipment and would carry them around the globe throughout the season. But because of a strict budget, the team decided to make 5 sets of such equipment and send them to different factories so that they could save the cost of transport which will also reduce the carbon footprint.[9]
It is believed that because of the budget cap teams would be forced to make innovative solutions which would eventually result in their ability to sustain themselves in the sport and would also prove to be influential for improving the environment.
Will the Budget Cap be as effective as it seems?
The budget cap does not include marketing costs and driver’s salaries which is a huge part of the total amount spent. Mercedes spend around $50m on driver salaries whereas Haas only spend $1m. The amount spent on drivers will definitely have an effect on a team's performance but this difference in performance is caused because a team’s ability to spend is not covered under the budget cap. The teams could also tell the drivers to hire their own mechanics and engineers etc. and in turn, could increase their salaries. By doing so, the teams could find a way around the cost cap.
It is very evident that under the cost cap, the current number of people these big teams employ cannot be sustained and therefore it will lead to layoffs. Ferrari suggested that they can shift their workforce to other motorsports such as Indy cars. This solution has been adopted by many teams including McLaren’s. If the teams can shift their workforce to other sports, the teams could also disguise their expenditure on research, developments etc. of their Formula 1 car as expenses incurred in other motorsports.
It is true that the cap is efficient for sustainability and ensures that teams can compete in the sport and that there are no unnecessary barriers to entering the sport.
But as far as levelling the playing field is concerned it does not seem to be as effective as it claims to be. It is quite difficult to set a limit in a budget cap. If it is too high then the cap would be redundant, if the cost is too low it will take away the glamour from the sport and big teams would not agree to give up the competitive advantage that they have.
The budget cap will have an effect on how much a team can spend on the performance of the car which will, in turn, make the field more competitive. But the teams still have the liberty to spend on other areas and could come up with ways to hide or manipulate the expenses. The FIA has also failed to address another important issue which deals with the amount of money the teams get for competing in F1. The big teams seem to earn a lot more than the teams finishing lower in the grid. This is a very important issue which if resolved, could increase the competitiveness more efficiently than cutting the costs.
The budget cap has been introduced for the first time in the history of this sport, the question of whether the cap will be effective or not can only be answered with time but surely the regulation would need some modifications and other agreements in order to achieve their goal.
*The author is a law scholar of Jindal Global Law School, India.
(The image used here is for representational purposes only)
References:
[1] Lawrence Barretto, ‘The 2021 F1 cost cap explained – what has changed, and why?’ (Formula1 Tv, 27 May 2020) <https://www.formula1.com/en/latest/article.the-2021-f1-cost-cap-explained-what-has-changed-and-why.5O1Te8udKLmkUl4PyVZtUJ.html>
[2] Giles Richards, ‘F1 teams agree to introduce budget cap from 2021 onwards’ (The Guardian, 23 May 2020) <https://www.theguardian.com/sport/2020/may/23/f1-teams-agree-to-introduce-budget-cap-from-2021-onwards>
Lawrence Barretto (n 1).
[4] . Castro, X. Diseño, Optimización y Análisis Aerodinámico de un Fórmula 1; Universidad Rey Juan Carlos: MóstolesSpain, 2018.
[5] Giles Richards (n 2).
[6] Edd straw, ‘EIGHT WAYS THE COST CAP WILL CHANGE F1 THIS YEAR’ (15 Jan 2021)
<https://the-race.com/formula-1/eight-ways-the-cost-cap-will-change-f1-in-2021/>
[7] Dieter Rencken, ‘Why a cost cap is no cure-all – and why F1’s big teams are fighting it’ ( 14 February 2018)
<https://www.racefans.net/2018/02/14/f1-cost-cap-big-teams-fighting/>
[8] Brett Knight, ‘A New Budget Cap Gave Small Teams A Reason To Stay In Formula 1. They’re Thinking Much Bigger.’ ( Forbes, 22 July 2021)
<https://www.forbes.com/sites/brettknight/2021/07/22/a-new-budget-cap-gave-small-teams-a-reason-to-stay-in-formula-1-theyre-thinking-much-bigger/?sh=1e18b85d1ad0>
[9] James Elson, ‘McLaren's unusual solution to cut costs and stay within F1 budget cap’ (MotorSport, 16 February 2021)
<https://www.motorsportmagazine.com/articles/single-seaters/f1/mclarens-new-tools-team-makes-unusual-cost-cuts-to-to-stay-within-f1-budget-cap>