The plan to fix F1's biggest flaw

Since the early 1980s Formula 1 has been governed by a series of Cons - not of the illegal variety, we hastily add, although more than a few team owners, promoters, broadcasters and advertisers admit to have been taken in by smooth patter during this time. F1's governing Cons are better known as Concorde Agreements, and, more latterly, Bilateral Contracts, in turn supplemented by Concorde Implementation Agreements.

However, the word at Barcelona during the weekend was that the concept of time-bound covenants, whether composite (as during the early days), trilateral (1998-2012) or bilateral (2013-present), would be ditched by the Formula One Group's owner Liberty Media Corporation - and the target date is well before their expiry at end-2020.

However, the plan is to replace the exist Cons with yet another Con: a Constitution governing F1 going forward. Where "agreement" is defined as a "negotiated and typically legally binding arrangement between parties as to a course of action", "constitution" is defined as a "body of fundamental principles or established precedents according to which a state or other organisation is acknowledged to be governed".

Spot the difference?

F1's controlling shareholder Liberty has acknowledged the shortcomings of the present governance process (and, by implication, the championship's flawed revenue structure), and plans to rectify them quickly. Where Concorde Agreements were typically tactical documents drawn up to serve a particular purpose - and usually agreed at the last minute - a constitution is a strategic document designed to outline guiding principles.

That statement perfectly encapsulates the difference between F1 under CVC Capital Partners - a venture fund more usually taking a 'quick-in/quick-out' approach for the benefit of a privileged few fund holders - and the listed company that is Liberty, which seeks to "focus on long-term gains rather than short-term results".

Where Concordes were typically changed every five years - although one (2010-12) lasted just three years and its predecessor a full decade - F1's proposed constitution will be an overarching document updated through amendments on an as-and-when basis.

The US Constitution ("We the people...") provides a template for F1: created in 1787, ratified a year later and in force from 1789, the constitution has been amended 27 times, and then only after the due process of ratification by a requisite number of states was followed.

Intriguingly the first 10 amendments were introduced as a block (Bill of Rights) six months after the constitution came into law, with a further five introduced before 1900. The remaining 12 were introduced during the last century - which saw two devastating wars and massive social, economic and technical change, and none this millennium. That points to a perfect template.

The principles of F1's constitution will be based upon precedents, with positives such as technical/sporting groups, the F1 Commission and subsequent ratification process by the FIA, and a fairer revenue structure likely to be retained, and farcical elements such as the Strategy Group and inequitable payments - dreamed up by over-greedy accountants with no intrinsic knowledge of F1 - dumped where they belong.

As with the US equivalent, amendments to F1's constitution could be proposed and seconded by a requisite number of members of the F1 Commission - consisting of representatives of all teams, engine suppliers, key technical partners, sponsors, broadcasters, race promoters and FOG/FIA - and ratified by the majority.

The constitution will provide for dynamic governance, rather than be constrained by the inflexibility and inertia that currently characterises F1.

One of Liberty's objectives is to create stable shareholder value, and the company soon sussed that expiry dates have the opposite effect - something CVC clearly did not get, or why else did its masters cut short-term deals? Obviously the value of F1 is substantially higher on the day after agreements are signed than on the day before their expiry, yet CVC obviously failed to suss that - or found no way around it.

"The trick is do away with sunsets," said one astute insider, "because the closer you get to sunset, the less the value of the company. Then the cycle starts all over again.

"Liberty understand that, and that is why Chase [Carey, F1 CEO/chairman] and co are looking at a constitution rather than a Concorde going forward."

In a nutshell, Liberty needs endless summer days without intermittent darkness - a big ask, but eminently feasible if approached logically, and, above all, democratically. To do so it needs to persuade the privileged few they would be better off without their (arguably immoral) bonus payments and the Strategy Group, and to persuade the big spenders that it is in their best interests to cut back on costs sooner, not later.

F1 currently has 10 teams, split into three groups: manufacturer; elite independents; the rest. A dozen teams would be perfect, but it seems unlikely any newcomers will eventuate before the constitution is enacted - but it could be amended to increase the number of participants, just as the USA subsequently incorporated Alaska and Hawaii.

Ferrari and Mercedes constitute group 1, with Renault an associate member; Red Bull Racing, Williams and McLaren populate group 2 on account of having won championships in the past and receiving bonus payments, albeit of varying amounts; then the rest: Force India, Toro Rosso (owned by Red Bull), Haas, and Sauber.

The last group of teams presents no problem; indeed, any change to the governance and revenue structures would provide massive improvements over their current disenfranchised predicaments, as illustrated by F1's 2017 revenue schedule.

Offer them fully-fledged voting powers and a results-based revenue structure as outlined here last week and they would snap Carey's hand off in a single lunge.

Working upwards, onto the second group. Although Williams currently receives a heritage bonus, the team would be even better off were F1's total 'pot' divided equally, and substantially better off were the payment structure to be purely performances based. Ditto McLaren, albeit given its larger bonus, the team would benefit only slightly with an equitable structure, but more so if/when its performance improves.

That leaves Red Bull in group two. How to persuade the energy drink's owner Diedrich Mateschitz that he would be better off under an equitable structure without additional payments, given that the team scored around £70m in bonuses? Here Liberty's plan is as brilliant as it is ingenious: rob Red Bull to pay Toro Rosso more.

Based on 2016 results, under the current revenue structure both teams receive a combined £200m; under a result-based structure a total of £170m would accrue to Red Bull from FOG - so £30m less. However, sweeten the deal with promises to reduce costs by £50m per annum (£25m each), and Red Bull is better off to the tune of £20m...then include a share deal.

Sure, Red Bull team boss Christian Horner may squeal about reduced budgets, but there is no doubting Red Bull's junior team would benefit handsomely, and financial adjustments could in any event be made internally.

Asked last Friday in Spain about cost controls, Horner, long an opponent of budget caps, said: "What I'm in favour of, and would expect probably every grand prix team to be in favour of, is to try and control the amounts we're currently spending, perhaps through simplicity of the regulations, perhaps de-cluttering the regulations.

"Formula 1 moves at such a pace that every area is under scrutiny, and that drives spend. There's an opportunity with the new commercial rights holder, in conjunction with the FIA, to really look at what are the key cost drivers, and go upstream and deal with those.

"That will naturally have an effect on the outcome of how much you can and can't spend."

Unsaid was that such an initiative should save Red Bull's two teams more than £50m per annum.

Although Renault finds itself in the top bracket of teams by virtue of being manufacturer-owned, it currently enjoys no benefits, and is unlikely to do so before 'sunset'. Effectively Renault should be lumped into the bottom group, despite having won double championships in the noughties - so it would benefit commensurately from any change to governance and revenues.

That leaves Ferrari and Mercedes. Ferrari, of course, pockets the largest share of revenues on account of its "Long Standing Team" status, receiving over £85m in bonuses this year, and around £70m in results-linked payments. In an equitable world the team would receive £85m -a shortfall of approximately £70m. How to compensate the Scuderia for lost earnings?

For starters, since signing its bilateral agreement with FOG (in 2012), Ferrari was listed on New York's stock exchange (ticker: RACE) in October 2015 - so is mindful of the enormous drain an F1 campaign potentially has on profits. Get it wrong, and shareholder value is screwed; get it right and the team breaks even.

Ferrari needs no persuading that a meaningful cost reduction programme is in its best commercial interests. Already team principal Maurizio Arrivabene is talking about cost savings, responding to the same question as posed to Horner (above) with:

"Before talking about a cost cap we need to understand how in the future the actual commercial owner wants to grow the business of Formula 1, to create more interest and also to work on the split-up of the [agreements] of Formula 1."

Whoever would have thought Ferrari would openly speak like this?

Still, in the short-to-medium terms cost controls are likely to save teams no more than £50m annually, yet Liberty would need to make an offer worth at least £70m annually to get Ferrari to listen. Here the proposal is as cunning as it is simple - Liberty provided for £350m in shares to be acquired by teams, who in turn shunned the offer until they knew what the future under Liberty held.

"We think it's important to offer the teams the chance to invest in F1 and further align our interests," Greg Maffei, Liberty's president and CEO - and Carey's boss - said while making the announcement in January.

Ferrari is believed to have been offered a tranche of shares to a) accept the constitution, b) accept revised revenue structures, coupled with meaningful cost reduction programmes, and c) commit to F1 for the long haul. Talks between Ferrari's New York-based lawyer and Liberty are believed to be progressing well as this is written.

The same basic deal has allegedly been tabled at Mercedes, although the numbers are commensurately lower given the team is set to earn £160m this year rather than a performance-linked £125m - although meaningful cost controls would more than compensate the teams for its £35m "loss". These would not, though, tie the iconic team to F1 in the long term, hence the offer of shares.

By all accounts the constitution model is not only the way forward for F1, but would erase the last traces of the rule of F1 tsar Bernie Ecclestone and ex-FIA president Max Mosley, the double act that drafted the first Concorde in the '80s, then imposed all subsequent editions on F1 through to 2012.

Based on comments made by sources in Spain, discussions are well advanced on both the governance and revenue fronts, with FOG executives and the majority of team bosses being confident a deal could be struck. The only remaining question, then, is: "When?"

If one of the world's largest and most disparate emerging nations could create, ratify and introduce a peace-making constitution in two years, why should F1 require double that to correct its fundamental imbalances?

Equally, given Liberty's US roots and NASDAQ listing it is fitting, if rather ironic, that the company is turning to US constitutional principles to restructure a Euro-centric sport. If Liberty does constitutionalise F1 it will have achieved more in a few years than Ecclestone managed in a lifetime.