RRA: Has Horner got a point?

Written by: James Parker, TJ13 Chronicler

Formula 1 has entered a very painful stage over the past couple of weeks. With the first of the “mini breaks” coming into force so soon after the start of the season it has left fans yearning for the action to start once again – something thankfully which will be fulfilled this weekend.

News has been painfully slow and sporadic in the Formula 1 world during this 3 week hiatus, and it has meant there have been just scraps to fight over. But one story which I felt was quite interesting which came to light was Christian Horner’s comments regarding the RRA or “Resource Restriction Agreement” and why it potentially is not the right way to ultimately secure the sustainability of Formula 1 in the future.

It must have been a breath of fresh air to talk about something outside the underpinnings of the dreaded “multi 21” debacle, and let’s be honest; we have all pretty much had enough of hearing about it in the build up to the Chinese Grand Prix.

Horner’s comments were as follows, which were quoted from the corresponding Autosport article:

untitled“We have been talking about a budget cap for about five years now. The hardest thing in the world is to police what a company spends,”

“A resource restriction is an agreement that is fundamentally flawed because of the structures of different companies: Ferrari operates in a completely different way to McLaren or Mercedes or Red Bull.

“The best way to control costs is through stable regulations”.

“For example the biggest impact on Sauber’s costs next year will be a change of regulations with the drive train, so really the most sensible way to contain costs are stable, clear and concise regulations – both sporting and technical.”

Now it is easy for the Team Principal of a Red Bull team that boasts the biggest budget in Formula 1 (in excess of £300 million), to state that a cap on that budget that they can operate within is not the way forward in regards to Formula 1, after all a budget cap would see the money pot dwindle hugely from that £300 million per season.

But taking all into account, I do believe he does have a point here, and I think the current regulations have proved that somewhat.

In a world surrounded by the homologated engine freeze, slashed price customer engine deals and no major aerodynamic revisions (2009 aside) the Formula 1 paddock has only got stronger, more competitive and with that, produced some of the best racing in modern history. In essence, a period of stable regulations has given Formula 1, on the track at least, the biggest lease of life – that of course will all change next year potentially.

untitledNow, one could argue that with the current economic climate as it is, with triple dip recessions and a worldwide monetary crisis set to dominate for a further 3-5 years at least, the only way Formula 1 can stay sustainable would be to restrict the resources available to all teams on the grid. With the big teams limited when it comes to utilising their resources it would allow, monetary challenged teams further down the field such as Marussia and Caterham a fairer chance of an even playing field.

But are major regulations changes more at risk of causing a sustainability risk to the sport?

It is true; Formula 1 did need to change its ethos when it came to road relevance. Turbo charging and hybrid technology are the dominant forces within the current car market at the moment, with small low pressure turbo engines being favoured by the majority of car companies with new models.

The sport in general has always been heralded as the key to unlocking new technology for road use, take both traction control and ABS as stark examples, but the question really is….. is the change mistimed?

With large Independent teams like Williams and Sauber having to focus their driver selection process solely on the amount of cash in the drivers wallets (take Maldonado and Guttierez for example) due to the incredibly difficult economic conditions being experienced, the 2014 major regulation changes have only compounded the problem when it comes to their long term future and sustainability.

Without the teams, Formula 1 would not be a sport, so to see so many struggling definitely does cause me quite a lot of stress. A perfect example of the measures teams have had to take is Marussia, who, whilst picking Bianchi on his obvious talent, were almost forced to bring the young man in to secure Ferrari turbo “power units” for 14 (highly speculated and generally accepted, almost gauranteed).

Now the reason a RRA has not been agreed over the past 5 years is solely down to the disagreements amongst teams when it comes to the allocation of resources. The idea in essence is a good concept; however can it ever truely be properly policed by the FIA?

Measurement is key, and clear concise aspects need to be clarified in order to police such an agreement. Tangible aspects which are easy to control such as wind tunnel usage and CFD (when it comes to car design) are incredibly easy to measure, and in that regard it can be policed in the same way as in season testing.

untitledBut with a grid that compromises both Independent teams and manufacturers, alongside a variation in seasonal allotted budgets, the waters definitely start to muddy. With certain teams on the grid associated with fairly large motoring organisations such as Ferrari and Mercedes, it would be incredibly difficult to track how the resources would be split up, in comparison with Independent teams like Sauber who have far fewer pies to bury their budgets and therefore would be a lot easier to manage.

This is where I feel Horner does have a point when it comes to the RRA. Unless it can be properly policed, which will always be very unlikely due to the power of Manufacturer backed teams, an agreement such as this could never become a reality. We have seen that over the past 6 years in the sport, when stable regulations have been at play, Formula 1 has become hugely prosperous.

Gone is the Schumacher/Ferrari dominated era where costs were no object. Homologated engines and limited testing alongside strict aero regulations has seen the Formula 1 paddock rise to its peak in competitiveness and potentially, that may be the answer when it comes to future sustainability of the sport until a clear concise and realistic agreement can be met by ALL teams.

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24 responses to “RRA: Has Horner got a point?

  1. Very interesting issue. However, biggest problem with a RRA is not the difficult auditing / enforcement of the agreement. Is the fact that F1 is a sport (or discipline), in which 10 or 11 teams are willing to invest to gain a bit of time per lap. If regulations are stable, the big teams will still invest a lot of money to improve their cars anyway. We may say that the marginal improvements are smaller under stabler regulations, but that’s only true until one team starts thinking disruptively (see Lotus this year) and find some time in a new development.

    So, restricting number or workers… teams purchase pieces from external providers. If a budget cap is put… then there is a problem with auditing. If wind tunnel hours are restricted, then teams invest a lot of money in CFD, and if CFD hours are restricted, teams will find another technology that will give them the time they are looking for, until they run out of money, and they will keep asking Mr. E. for a larger share of the pie year after year.

    Only real solution would be to make F1 a standard series (same car for everyone) and a salary cap on drivers and team, perhaps with a draft ala NBA for new talents. But it goes so against the spirit of F1 that we will never see that, luckily.

    • Interesting point of view. If the rules were absolutely rigid then in effect the series would eventually become a spec series.

      I think Horner knows this would be against F1’s DNA and thus changes in rules would occur and again play into the hands of the bigger teams with their bigger budgets.

  2. The RRA will never work and those in F1 know it. There would be nothing stopping the road car groups of Ferrari or Mercedes from developing a new gearbox which was intended to go on a roadcar and “discovering” that it just also happens to fit into their F1 car. It’s sold to their F1 team for a few thousand $ while the privateers spend 100’s of thousands developing their own. Ferrari and Mercedes can easily claim it’s an off-the-shelf item.

    Yet while the FIA are pushing for an RRA they asked the engine manufacturers to spend 100’s of millions developing new “green” engines. One of the main reasons was the belief that this new format would encourage other manufactures to enter F1 as the technology could be used it road cars. LaFerrari showed that you don’t need F1 to design a sophisticated energy recovery system for a car. But the real stupidity behind the new engines is belief that other engine manufacturers will now enter F1. If Ferrari, Renault and Mercedes have to supply at least one team plus their own team to make the engine development economically viable, we have 6 teams supplied. If Honda supplied McLaren we are at 7 teams. With Ecclestone only wanting 10 teams, would you as an engine manufacturer risk spending millions to develop an engine that more than likely would be used by a tail-ender? I wouldn’t.

    • Would definitely echo your thoughts cavallino,

      The reason why the RRA has not been enforced over these past 5/6 years is all down to conflicting interests from the major players on the grid. I think it is the main reason why Horner is against it, as he knows that the likes of Mercedes and Ferrari developing “new technology” on the cheap for their F1 subsidies. I am not sure whether Renault would have the same type of relationship with RedBull, even though they are the “manufacturer backed” team in all but the name.

      Regarding development costs for the turbo units, I think that is the bigger issue here, as I previously glossed over in my article, change did need to happen to stay relevant with the automotive market – that was inevitable IMO, the big problem has been the timing of the change, it just does not make any sense. Formula 1 is struggling as it is, to then expect teams to spend a fortune in development costs for 14 has just been detrimental as a whole in the financial crisis.

    • I quite agree – I wouldn’t waste money putting my engine in an ‘also-ran’… and this perhaps partly explains the recent ‘cold-war’ between Mercedes and Ferrari to get their engines into Force India and Marussia in order to discourage even further the entry of new manufacturers/competitors. If Honda also supply a second team what hope is there for VW-Audi – or anyone else…? It is typical of regulation-makers to claim that this or that new rule ‘will’ encourage something else but but really it can only be their ‘hope’ – which of course the existing manufacturers can do their best to foil.

  3. I’m actually with Max Mosely on this one … a budget cap would not be that hard to police – there are accounting principles in place already (GAAP, I think), listed companies generally have to comply with Sarbanes Oxley (esp multi-nationals like Ferrari, Merc, Red Bull, Lotus, Caterham, etc), there are already in most countries criminal penalties for fraud where things like that are discovered. Forensic accountants know how to look for anomalous transactions, and subject matter experts can certainly help identify anomalous behaviours (eg a third party-supplied design for XYZ could not cost $10, or 2 different parts of the company eg one racing, the other marketing both contracted the same supplier for different services, or the Windows server had logins from 500 different users but there are only 200 staff listed on the payroll).

    In other sporting codes budget caps exist (eg in Australia here we have budget caps on football teams). Yes they are different sports, yes some people break the rules, but they are discovered. As long as the penalties are enforceable and substantial, most people will do the right thing most of the time.

    The bigger issue is that most companies don’t want to be audited, but if that’s the price of ticket to the ball, most will ultimately decide to dance.

    Disclaimer – I’m not an accountant, but I have had the misfortune of having to read and understand some accounting audit standards.

    • Indeed Marcin – Horner saying its difficult to police company spending – becomes more true if the company is determined to be devious. Less so if they are compliant/in agreement with the spending rules.

    • It would take a team of investigators a year to go through the expenditure of a team from the previous year. Even then they would be lucky to find everything actually spent.

      All motor racing is about spending money, even at club level, the team that can afford new tyres and new shocks for each race will beat the one that can’t. Then there’s better tyres, better brakes, better budget. Champagne vs tea afterwards. A restful night before qualy and the race or a tent in the rain on a hill, it all makes a difference.

        • Fraud or defraud, most large multinationals pay no or very little UK tax, using quite legitimate means they avoid liability. The teams push the rules to the edge on engineering, exposing some major holes in them, imagine that same cunning and imagination applied to finances.

          • “Tolley’s: Arming You On The Front Line”

            That’s the famous tax guide’s tag line.

            Damned right, too.

            All 18,000 pages of it.

            Otherwise I would pay 92% . . .

      • I’m not sure of your point there. Yes it would take a team of auditors/investigators. Yes it would take time. Doesn’t mean it’s not possible.

        As per your later point regarding companies paying no/little tax, the secret to enforceable regulations is simplicity. Every caveat or exception to a rule will become a potential exploitable loophole. The way a budget cap would be exploited would not be by expenditure disappearing, but rather by being absorbed into exempt areas.

        For example, need a new front wing, but run out of development budget? Hey, that’s ok – merchandising is exempt, so let’s make some ‘limited edition’ front wing souvenirs, and test them in the wind tunnel.

        However, the world is full of tax accountants and lawyers who can make the regulations just right.

        • My point is that even in the unlikely event that it was possible to have an auditing system that everyone agreed upon and everyone interpreted exactly the same way, we should have to wait a very long time for the championship and quite possibly some race results.

          The rules hitherto have in general been written to ban methods rather than effects or possible effects. Something that would need to change.

  4. You do make the point that Horner is obviously against the RRA because VBR are the highest spending team and they will see their spending power slashed. I think that’s what’s behind this. And of course as things stand, we would love to have stable regulations, because the new regs will favour the big manufacturers (in theory) and Ferrari and Merc seem to have more expertise or money than Renault (in theory again).
    If you were a small team, you would like some form of RRA plus changes in regs every 3-4 years so that you get the opportunity to discover something clever that noone else has seen and you can steal a win here and there. The caveat here is that the new regs shouldn’t increase costs substantially, ilke the engine regs now.

  5. At the end of the day it’s up to the teams how they run their own team, the RRA won’t work because as said “Teams operate in different ways, and Teams all have different budgets in different areas”.

    It’s up to the teams to go and find the income/spnsorship and spend it in the right ways to keep them going. If more teams put more effort into marketing/off track activities to raise awareness to they could generate more interest in the sport/team possibly bringing in more revenues.

    Now you can flip the coin and say what if the RRA was brought in: What would we have ? Staff possibly loosing their jobs(since this is not just about financials), teams finding devious ways around the rules and regulations.

    Lets use an example: You don’t see The FA telling Chelsea/Man united how to spend their income, or lower their costs. I don’t see why it should be any different in F1.

    • Hi James – good to hear from you

      Just to add to the example though, football clubs will soon be told how much they can spend on players wages – and seeing as this is I am told 75% of the costs for a football club – that is a restriction of note

      • Yep it’s called the “Financial Fair Play”, I still believe F1 Teams should be allowed to rule themselves though. I read(cant find it now) somewhere that the FIA were actually loosing money so I don’t see how you can have a governing body dishing out rules and regulations when they themselves can’t get their act together.

        • Aha – now that’s a different story. The funding for the FA/Premier League organisations is not controlled by a ruthless individual and a set of corporate craps players.

          Ask Mr. Moseley why the FIA is so poorly funded – he as president of the FIA sanctioned the sales of the 99 year F1 commercial rights lease to Bernie Ecclestone – and what did he get in return for the FIA?

          • I think it was £3.3 million per year, but “Todt the invisible” has just got a bit more from Bernie and also raised the team entry fees sky high, plus all the drivers licences have gone up.

    • Hi James

      The argument that ‘all teams are different’ is disingenuous. It’s true, but not actually relevant. They are not more different than a multinational mining company and a local IT service company. Yet they both have the same reporting & disclosure requirements (assuming they’re both listed), operate under the same laws for Occupational Health and Safety, etc etc. And the tax office can audit each of them.

      As to why have regulations? To ensure that a few don’t spoil it for the rest. That’s why there are, for example, environmental regulations that prevent factories pouring hazardous waste into waterways.

      • It is relevant, since if all teams were/are doing the same thing then it becomes repetitive, boring if you like. Nothing to separate them in terms of attracting new fans, encouraging sponsorship, ect ect.

        Yes you will have the various agencies who audit companies ect, but it won’t stop them being devious, I mean the Concord agreement didn’t stop teams from pushing the technical regulations to the point where some were asked to make changes to their cars, and called before the stewards.

  6. Who wants to knock down the idea of a central purchasing unit as a way to enforce RRA?

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