Formula 1's biggest scandal

Unfortunately there simply is no polite way of stating this, but the overall implication of the end-2012 financial results lodged by the Formula 1 division of CVC Capital Partners, the investment fund which acquired a majority holding of the sport's commercial rights via a mix of invested capital and leveraged loans back in 2006, borders on the scandalous.

In fact, so blatant is CVC's exploitation of F1 and, by extension, the unbridled passion of the sport's fans, by the entity that acquired the rights purely for short-term gain - as is the wont of such funds - that in the scandal stakes it arguably ranks right up there with the original sale of the sport's commercial rights by the FIA's previous administration for over a century for less than three per cent of their intrinsic value.

However, it can surely be no coincidence that in the very week that CVC revealed bottom-line earnings of over £500 million - made up of a mix of £330m profit and £200m refinancing dividend - for the most recent financial year, the operation known as Marussia posted losses of £59m on a turnover of half that.

Add in over £1.5bn in proceeds from the sale of various stakes in the F1 operation, and CVC's profits are spectacular - but undeniably to the detriment of the fans and, crucially, the sport.

After three years of participation in the world championship - having initially been attracted by ex-FIA president Max Mosley's ill-fated $40m (£32m) budget cap concept - the Marussia team during the corresponding period incurred loans and accumulated interest charges totalling £140m.

In April this year (thus outside the relevant financial reporting period) the losses were capitalised. The team has put a positive spin on this conversion of debt to equity on the basis that it illustrates long-term commitment to Manor Holdco (t/a Marussia) by shareholders (led by Russian billionaire Andrey Cheglakov).

Marussia has had a battle on and off track © XPB

However, Marussia is participating in an activity generating underlying revenues of a billion pounds a year, and thus there simply should be no need for such largesse.

There are, of course, those who suggest Marussia's predicament to be one of its own making, that the company's officers not only demonstrated poor business skills but failed to set the race tracks alight during the team's four seasons at motorsport's sharp end.

Against that, its directors have all proven extremely successful in non-F1 endeavours, be they software, property or feeder formulas. In fact, Marussia grew out of John Booth's mega-successful Formula 3 operation.

However, were Marussia the only team battling enormous illiquidity, its detractors may well have a point, but when such as Lotus - which won two grands prix in the past 12 months, yet in Singapore suffered the ignominy of having Kimi Raikkonen tell the world's media that his decision to jump ship to Ferrari was related to "the money side, and the things I haven't got, my salary..." - records same-scale losses, something is obviously screwy.

Sauber, in business for over 40 years, was forced to sell its Swiss soul to a Russian conglomerate to remain in operation, while (Frankfurt Stock Exchange listed) Williams is another team to have posted recent losses of £5m.

McLaren, one of Formula 1's grandees celebrating its 50th anniversary this year, took a knock of £3.1m for 2012 despite winning six grands prix, having made a profit of £22.3m in 2011. Would anyone accuse a company on-track to record revenues of £1bn for the first time in its history of financial mismanagement?

Fernandes has invested heavily in F1 © XPB

Factor in that Force India and Caterham both rely on the support of their billionaire benefactors to remain on the grid - one seriously wonders how much longer Vijay Mallya and Tony Fernandes (and their respective business partners) will endure - with rumours abounding that last-named is seriously reconsidering his F1 involvement on financial grounds, and CVC's apologists surely don't have a leg left to stand on.

At the root of the problem lies the Formula One Group's steamrollering of the teams and its exploitation of virtually every aspect of F1. The Suzuka pitlane provided a perfect example: on the fascia above each garage, where teams would dearly love to hang their logos as part of their marketing efforts, FOG mounted enormous billboards for its commercial partners. So, do TV audiences see Team A or B during pitstops? No, instead it's Brand X or Y, each having paid gazillions to FOG for the right.

While FOG provides teams with 10,000 kilograms of airfreight for so-called flyaway races, teams are required to use FOG's official logistics partner DHL for excess freight - at horrendous surcharge. One team boss recently estimated that his outfit's surcharges substantially exceeded the overall freight costs charged by other freight forwarders. Asked why he did not use them in that case, he replied: "Our shipments won't be cleared in time..."

FOG, by the nature of its business, has access to approved calendars ahead of the teams (and media). Thus hotels within a reasonable radius are block-booked well in advance by subsidiary agency Formula One World Travel, which in turn provides accommodation to F1 personnel at a fee - around 200 per cent of rack rate.

Where previously teams controlled testing, with the Formula One Teams Association administering activities such as dates, circuit rental, arranging revenue-sharing deals with promoters, and ensuring slots for teams to undertake moving car filming for commercial/team partner purposes, FOG has, according to team sources, hijacked the process and now controls pre- and in-season testing despite it being a sporting, not commercial, matter.

Testing will increase again in 2014 © XPB

Not only are teams now concerned they will not be allocated sufficient filming runs - when two teams run concurrently, FOG, not individual teams, owns the footage - but also that test budgets will take massive hits. According to one trusted source, within hours of the two Bahrain test dates being released, teams discovered their planned hotels were mysteriously fully booked, then were offered accommodation by FOWT...

Similarly air fares: where once Emirates was the airline of choice among F1 personnel, since its F1 partnership deal the Middle Eastern airline's fares for grand prix routings/dates have risen out of all proportion with identical routes during other periods - and in comparison with the opposition. Could it be that Emirates recovers a portion of its signage fees via increased fares, obviously to the detriment of teams, media and fans?

Race fees, too, have risen massively over the years - once venues have built enormous superstadiums at horrific cost with public money, local politicians are reluctant to bale out - forcing race promoters to hike ticket prices and other charges, with increased taxes and surcharges on taxis and hotels to cover the costs further hitting fans' pockets. In Singapore the taxi tax is 30 per cent of fares - which flows back to the local authorities to fund the race.

It doesn't stop there, either: when one promoter recently attempted to charge journalists £100 for internet connections during a grand prix weekend, he justified the cost on the basis that the promoting entity was in the red due to hosting fees. He cut the charge when asked whether he expected the media to compensate for his poor negotiating skills...

In Australia teams are charged the equivalent of a year's rental for a temporary hut during the race weekend; in Malaysia moped rental charges for five days were higher than the initial cost of the two-wheeler. At one venue the rental for a couple of coat hangers was £60 for the weekend. In each instance promoters pleaded that they were being bled dry by the commercial rights holder...

The net effect is that highly qualified engineers are now expected to fly the world in cattle class and eat off plastic plates as their teams fight to stay afloat while CVC's head honchos go about their business first class.

There are big financial disparities between the two ends of the grid © LAT

But, all these matters are relatively small beer in comparison to the greater extent of things: the numbers are for 2012, the final year of the 2010-12 Concorde Agreement - the document which regulates the sport's finances and governance - which catered for all teams to be treated equally, save that Ferrari received a 2.5 per cent sweetener and the new teams (Caterham, Marussia) an ex-gratia payment of £7m a year.

Now, though, the top four have all signed Constructors Championship Bonus agreements, which reward them handsomely (and grant them governance privileges), with Williams enjoying a one-off "heritage" payment.

The rest? No percentage change despite massively increased costs and a return to in-season testing brought about by the majors, who can obviously afford to fund such programmes via their preferential revenues.

The financiers plead that in terms of the commercial agreements the teams now receive 62 per cent of F1's underlying revenues versus the 47.5 per cent under the most recent Concorde Agreement - which is true, but equally disingenuous, for the majors split the increased share among them. Thus the statement is as accurate as accountants could make it...

And Marussia? It doesn't even have an equitable deal, although one hears that a bit of sabre-rattling - for which read threats of a European Commission anti-trust complaint - is said to have worked wonders. In fact, according to a recent report in Sport Business International, the EU is already investigating certain clauses contained in the race, team and broadcaster agreements held by FOG.

Thus, if times are tough for all bar the big four, wait for this time in 2014 when this year's numbers are released, when the real effect of CVC's patently myopic model really bites - but the nattily-dressed money men, who wouldn't know an F1 car from a race horse if they raced round their palatial mansions on the Cote d'Azure, already have that one covered.

It almost makes one think that they want one of the current 11 operations to fold; are possibly even doing everything in their considerable (financial) power to pre-empt such a situation. That would leave F1 with an easily manageable 10 teams, permitting them to split the grid into five A and five B teams to further reduce payouts, boosting profits even further.

And, if in the process they totally destroy the essence of F1 they are unlikely to care unduly: they will have banked at least five times their initial (borrowed) investment, so are unlikely to give the very fans they exploited for so long a second thought.

Will the EU ride to the fans' rescue? That will be about the only thing that will save F1 in the long term.