Budget cap Q & A with Max Mosley

Max Mosley: The experience with McLaren and the Ferrari thing last season is that if you deploy the resources and get sufficient expertise you can find almost anything. The chance of someone doing work that we couldn't find traces of, like with (secret) suppliers, is very, very slim. So we think it can be done, but we are at the early stages.

There is a meeting on Thursday with the finance people from the teams to talk about the generalities, and then we will start looking with experts and the teams at what could go wrong. We hope then to know enough to produce a rule by June. We may run into problems that nobody can foresee, but most of the accountants we talk to say it must be possible.

It is a bit like the tax people. In the end the tax people want to know everything that has come in and everything that has gone out, and if they were able to spend on a company the kind of money that we could spend in this case, I don't doubt they would be very, very sure of the tax. The reason people can cheat on their tax is that they can't check everybody at once.

Q. Would the limit for the budget cap be set at the upper reaches of what an independent team could manage, in terms of finding sponsors, but still give the big teams scope?

MM: We mustn't start off too dramatically, but we want to end up in a situation where a competently run, independent team runs at a profit. If you don't do that, they either go out of business or you have to have a succession of eccentric billionaires or car companies to keep the thing going. That is a little bit the situation we have got at the moment.

Q. So will it be like a sliding scale, where the first year cap is set quite high and then the budget gets reduced gradually over subsequent seasons?

MM: That is being talked about. That is very much the topic for discussion on Thursday between the teams. You have to pitch in on the high side to begin with, and then come down.

They all want to do it, and they all like the idea of freedom to do what you want, but to spend the money in an intelligent way. So it is a very attractive principle. It is the old Keith Duckworth saying: an engineer can do for one dollar what any old idiot can do for 100 dollars. And that is very much the spirit of the thing - to spend your money cleverly.

Q. Will this be something where it will be up to the teams to cooperate to make it work?

MM: I think so. The car company teams, they all know that the lower the cost, the greater the chance of the parent company staying in Formula One. The independent teams all know that if we don't get the costs down and they don't make a profit then eventually they will be out of business.

So there is tremendous incentive there, and particularly at the moment the car industry is a little bit nervous with the threat of recession in the markets.

If you look at any of the companies in Formula One, their shares are down substantially since the summer, and that means the markets think they are going to make less profit. Well, if that happens, then a very quick way to add $100 million or $200 million (USD) to your profit is to shut down your F1 team. And F1 teams are conscious of that.

The other thing is that the teams are starting to realise is that it (a budget cap) isn't quite as mad as it looks. When we said one engine per weekend a few years ago, I have never seen such anger from one or two team principals. But now if you said to everybody, 'let's go back to three engines per weekend rather than one per two weekends', they simply would not do it.

Q. Isn't there a risk with a budget cap that it will force people into having two teams, like Honda and Super Aguri, because you will get more information from a second outfit?

MM: Yes, but let's say Honda were going to get information from Super Aguri. Our 'tax' inspectors will say, 'you got some information from Super Aguri', we believe the retail cost of that is X. Equally, if two big teams said let's share a wind tunnel, then they will both be invoiced for whatever they had on the same basis as everyone else.

What about the problem of rolling over budgets from season-to-season? Teams often bring forward cash from the following year to boost a championship challenge, or may shift money to the following season if things are not going so well in the current campaign...

MM: That is a concept that accountants are very familiar with, because people do that to manipulate their profits. An awful lot of problems we have got will be reinventing the wheel as far as accountants are concerned.

If you are running a dodgy company, you would do creative accounting - you would make profits go down by increasing depreciation, or you would extend the life of something. Accountants deal with that all the time. Quite often, particularly in post Enron days, accounting standards have become very high.

Q. So will you have to employ a new department of accountants?

MM: I have been thinking. In the most extreme case, we will probably employ for say 10 teams, 30 people. You would probably recruit them from the Inland Revenue special office in English, or Germany, French and Italy equivalents. You would take them around the teams, and rotate them so they never became native, and leave them in there to look at everything. The total cost of that, compared to the money that you would be saving, it would probably cost you one percent. We will also probably have a commission of independent financial experts.

Q. And would you get the teams to pay for this themselves?

MM: Yes. The calculation is that if the average spend at the moment is 200 million Euros and it came down to 100 million Euros, then if each team paid two million for this department they would still be saving 98 million. It makes complete sense.

The first reaction from the team principal will be that it is intrusive and they don't want people poking around their factory. But when you think about it, they will be happy with the budget cap and happy to spend less because it keeps them in business.

But what will make them deeply unhappy is if any other teams gets around the system, or finds someway of cheating. So the more draconian it is, the more at ease you can feel. The honest team manager doesn't want to cheat, but also wants to be absolutely sure that no one else is cheating.

Q. And what about teams trying to find ways to beat the system?

MM: The teams don't think in terms of cheating, they think in terms of pushing it to the boundary. And there is quite a big difference there.

But where it will get difficult, genuinely difficult, is where do you take the boundary and what do you do if someone is just over it. You cannot do an audit in February for last season and say: "oh, you've spent five million dollars too much, you are disqualified".

So there is a lot to it. But one of the aspects is going to be that if there is anything that is slightly grey, then you will have to ask. It is a bit like the technical stuff, where they ask a question and then they get an opinion from Charlie (Whiting).

In this case, they will probably get a ruling that will be circulated to all the teams. It is not like a technical secret that you cannot tell other teams. There is no reason not to tell everybody - like, for example, if someone comes along, for example, and asks if they can include the boss's car. There is an awful lot of detail that has to be worked out.

The only thing you realise when you start looking at it, is how complicated it is. But the benefit of solving the problems is so great.

Q. How can you police what it done by the manufacturers? A Formula One team is a self-contained unit, whereas how do you know what is happening at Honda or Toyota?

MM: It only makes a difference what the manufacturer does if he transfers it to the F1 team. We don't believe it is possible to do that without leaving traces, which we will see.

For example, suppose the KERS system was being developed in the main factory. You will say, where did it come from? Who designed it? Where are the people? Then we will assign what it cost, and the auditors will see if it is a genuine arms-length budget.

We have to see how it works out, but I think it will be difficult (to hide) if someone is running a wind tunnel in the mountains of Argentina. That information still has to come from somewhere. People don't just have brainwaves in the middle of the night anymore.

Q. In five or 10 years people will need new wind tunnels or factories. How do you deal with big capital expenditure like that?

MM: This will be a subject for discussion with the teams. But in principle you would take the asset, take its natural depreciation and you would assign it an hourly cost as you would if you were running a business and renting it out to people. It would be a complete accounting exercise. The only difficulty would be to make sure you were equitable between the computer on one side, the wind tunnel on the other. There will be debates on how quick things depreciate.

Q. How much are you expecting to save by introducing a budget cap?

MM: Well, I don't know. I haven't really done the figures. I would have thought that taking everything into account, you are probably talking about two to three billion Euros in terms of total turnover for F1, including engines, at the moment. I think it will be disappointing if we cannot half that.