In 2013 the Fédération Internationale de l’Automobile (FIA) gave the green light to controversial rules which allow the top six teams to propose changes to the F1 regulations whilst the four remaining outfits no longer have a say in it.
Several F1 teams questioned the legality of the new rules and in late 2015 two of them - Force India and Sauber - made a complaint to the European Commission (EC). In February their views were endorsed by the European Parliament which voted in favour of “an immediate investigation into competition concerns arising from the Formula One motorsport industry.” The call was tabled by Anneliese Dodds, Labour MEP for the south east of England which was home to F1’s smallest team, Manor, until January when it crashed into administration with the loss of 150 jobs.
“I strongly believe competition in the sport is in breach of EU competition law and that it is putting jobs at risk both in the sport, and in the South East of England which I represent. Most recently Manor Racing, which is based in Banbury, Oxfordshire, was put into administration and folded due to the administrators being unable to find a suitable buyer,” said Dodds in a letter dated 30 January to Margrethe Vestager, the European Commissioner for Competition.
Dodds urged Vestager to act swiftly in investigating “the allocation of prize money and a cartel-style administration of the sport’s rules that favour only the largest teams...before we lose further teams and competition in a sport loved by millions of fans.”
In 2015, the latest year for which data is available, the teams received a total of $ 903.8 million in prize money. However, an estimated 45.4% of it is paid to reigning champions Mercedes, Red Bull and Ferrari which gets a bonus of around $92.2 million before even hitting the track as it is F1’s oldest team. Prize money is paid according to the previous year’s results and even though Ferrari finished fourth it got more than any of its rivals. Its $167.8 million haul was more than three times greater than the amount paid to last-placed Sauber.
Team budgets follow suit with the top performers spending around $500 million annually compared to Sauber’s total of around $110 million. The more a team spends, the better it tends to perform and the more prize money it gets. It makes the top teams resistant to change and puts minnows in jeopardy. A budget cap could reverse this, as it would reduce the performance gap between teams, and a $200 million limit was due to be introduced in 2015. However, the top teams gave it the red light and the FIA gave them the vehicle to do so.
The terms of the FIA’s governance are set out in a contract known as the Concorde Agreement, named after the location of its headquarters in Paris on the famous Place de la Concorde. The contract is signed by the FIA and F1’s Commercial Rights Holder (CRH) the F1 Group, which was sold in January for $8 billion by the private equity firm CVC to American investor Liberty Media.
The latest iteration of the contract, the Concorde Implementation Agreement, was signed in July 2013 and runs until the end of 2020. It significantly boosts the FIA’s income and notably allowed it to purchase a 1% stake in the F1 Group for just $458,197.34 even though it was worth $70 million at the time. The stake could only be cashed in when CVC sold its shares and this required the FIA’s approval fuelling claims that it had a conflict of interest.
Damian Collins MP, the Chair of parliament’s Culture Media and Sport Committee, told ITV News the sale amounted to a “severe conflict of interest”. However, in a statement, the FIA said “there is no conflict of interest on the part of the FIA” and it “would naturally be happy to demonstrate the absence of any conflict of interest to any competent authority that may so request.”
The stake alone gave the FIA a profit of $79.5 million and the annual regulatory fee it receives from the F1 Group rose from $11.5 million to $25 million under the new contract. In addition, the F1 Group increased the amount of freight it transports at no cost to long-haul races for the FIA from 12,500 kg to 16,000 kg. It now also gives it 10 economy class and 10 business class air tickets to a long-haul Grand Prix compared to 20 economy tickets previously.
The total boost to the FIA from the increased fee and sale of the stake alone comes to $187.5 million. Under the 2013 contract the FIA also committed to new sporting governance arrangements including the creation of an organisation known as the Strategy Group which is the sole body in charge of making proposals for changes to the F1 regulations.
Prior to 2013 changes were proposed by a body called the F1 Commission which included the FIA president, the F1 Group’s chief executive, a representative from every team, eight tracks, two sponsors, one tyre supplier and one engine supplier. Each party had one vote with decisions carried when 18 were in favour.
In contrast, the new Strategy Group has 18 votes with decisions carried by a majority. The votes are split three ways between the FIA, the F1 Group and the six leading teams based on their results – Ferrari, McLaren, Mercedes, Red Bull Racing, Williams and Force India. It means that the voting power of the FIA and the F1 Group increased from less than 5% each to 33%.
The bottom four teams do not get a vote in the Strategy Group though on Tuesday the FIA confirmed that representatives from them will now be invited to the meetings. The FIA said this is so that they “have access to the discussions, demonstrating the effective commitment of both the FIA and the Commercial Rights Holder to improve transparency in the sport.”
In 2013 the CRH made a one-off payment of $5 million to the FIA in recognition of it entering into the Concorde Implementation Agreement. The payment was made when the contract came into force which is when the new rules were implemented. So the regulator benefited, as did CVC because the voting power of its asset increased. The losers were the four smaller teams which had a say on proposals for regulation changes as members of the F1 Commission. That body still exists but it can only approve or reject proposals from the Strategy Group rather than suggest changes itself.
The FIA doesn’t deny that its income from F1 increased under the new agreement and documents reveal that it used part of it for the benefit of its member clubs. This was done by establishing a development fund and there is no suggestion that the projects which receive grants are illegitimate or that the process is improper in any way.
In a statement the FIA said that “the Concorde Implementation Agreement entered into by the Commercial Rights Holder of Formula One and the FIA in 2013 introduced a new governance structure for Formula One and redefined certain conditions applicable to their relationship, in particular to ensure that the FIA be properly remunerated for its regulatory role.
“Within this Agreement, a lump sum payment of US$5M was made to the FIA as part of the global consideration received in connection with the renegotiation of the terms of the agreements between the CRH and the FIA, and of the Concorde Agreement, at that time.
“Following its approval by the boards and the shareholders of the CRH, and by the competent bodies of the FIA (the Senate and the World Motor Sport Council), the Concorde Implementation Agreement came into force and this sum was paid to the FIA and properly accounted for. No individual received any payment out of this sum.”
No sooner had the Strategy Group been enshrined in the Concorde Implementation Agreement than teams suggested it may be illegal. In 2013 Force India’s deputy team boss Bob Fernley told the Daily Telegraph that “some of the teams have grave reservations about the legality of it.” He added that “there is genuine concern among some of the teams on the Strategy Group, particularly the ones who are public companies. This is not ethical governance.”
Force India joined the Strategy Group in 2015 but it lodged an EC complaint about it in September that year after attending several of its meetings. It had already felt the impact of the Strategy Group when it blocked a $200 million budget cap the previous year. As Force India is one of F1’s smallest teams it would have benefited from this more than its fellow Strategy Group members.
The cap could have prevented Manor from collapsing and would have boosted the chances of a rescue deal for Caterham, another F1 minnow. It went into administration in October 2014 owing £28.4 million but failed to find a buyer so had to close its doors with the loss of 276 jobs.
“I do think it would have boosted Caterham F1’s chances of finding a buyer,” says Finbarr O’Connell, partner at the team’s administrators Smith & Williamson. “Even though there would still have been substantial disparity between the teams’ budgets the disparity would have been greatly reduced.
“The costs allocated to or expended by the bigger teams would be reduced by a very large percentage. This would make the smaller teams more competitive, more successful and hence there would be more interest in them and in acquiring them if they came up for sale.”
As the smaller teams are at most risk they arguably should have played a bigger part in the decision-making process. Instead, their influence diminished through the introduction of new rules in a contract which the regulator entered into and received $5 million in recognition of doing so.
The reverse in influence of the smaller teams could explain why Sauber and Force India complained to the EC. Dodds said in February she is “happy that...the European Parliament backed my call for a full and immediate investigation into anti-competitive practices in Formula 1.” She added that “smaller teams are unfairly punished by an uncompetitive allocation of prize money that will always give the biggest teams more money.”
The statement released by the FIA in the wake of these comments made no mention of the Strategy Group but said “the prize money allocated in the Formula One World Championship is done so in accordance with the bilateral agreements that exist between each team and the Commercial Rights Holder (CRH). The FIA has no knowledge of these agreements.”
Firing off a warning shot to Liberty Media, Sauber’s team boss Monisha Kaltenborn said to sports website Racer in January that “the kind of system we have and what you hear from the new owners, we don’t see how the system is going to work until 2020, if certain financial privileges are given irrespective of what the result is.” She added “I think everything has to be looked at, and we have a completely new basis.”
Changing all of the contracts would require agreement from all of the teams which is no mean feat but the threat of an EC investigation is equally severe as it could dent investor confidence in Liberty Media which is listed on America’s Nasdaq stock exchange. As the F1 world waits with bated breath for the next move, Liberty is in a race against time to find a solution.