- Formula Money
Does a street race need government funding?
When the proposed Grand Prix of America was announced in October last year the organisers made it absolutely clear that the race would receive no state funding. This was seen as a big selling point, particularly in light of the political tornado which was swirling around in Texas as a result of the $25m which the state had made available to support the United States Grand Prix in Austin. However, one year on Austin's political problems have calmed down and its inaugural race is on track for next month. In contrast, there is still a question mark over New Jersey's Grand Prix despite it being scheduled to take place in just eight months. Ironically, government funding could now be just what it needs.
If it does go ahead, the Grand Prix of America would be one of the most stunning races in F1 as it sits on a 3.2 mile street circuit which snakes alongside the Hudson river opposite Manhattan's historic skyline. However, it has been beset with problems since it was first announced.
First F1's boss Bernie Ecclestone revealed in April that the race may have to be delayed until 2014. Then, one month later, he revealed to ESPNF1 that the organisers, who are led by US fund manager Leo Hindery, were late with their contract. "We are waiting for different parts of the contract to be agreed. They are late," he said. At the end of August, Tom Cotter, the president of the race, announced that he was resigning and just a few weeks later Ecclestone gave an insight into why this may have happened.
"They have not complied with the terms and conditions of the contract which is now gone anyway. They don't have a contract," he said. The race has been included on the 2013 calendar but carries an asterisk stating that it is subject to confirmation.
Ecclestone's latest statement on the matter came over the Japanese Grand Prix weekend when he said that the race organisers "are way behind with a lot of things. I don't think they will get it ready in time." Although construction on the site has begun, and there is visible progress on the garages, local news outlets have reported that they were always planned to be built and are just being customised for F1.
All the while, the race's PR team has denied any problems. Sebastian Vettel and David Coulthard drove demonstration runs on the circuit and both Hindery and even New Jersey Governor Chris Christie have confirmed that the race will take place as expected next year. Although the organisers have released numerous press statements, one detail which isn't found in any of them is where the funding will come from.
The hosting fee for the Grand Prix of America is estimated at $25m annually then there are the costs of upgrading the local facilities to host F1 which are expected to come to $50m. It is a significant sum and, generally speaking, there are only three sources it can come from.
There only tend to be three types of investors in F1 circuits: property developers, high net worth individuals who are fans of F1 and governments. It is hard for property developers to invest in street races because the roads are public so usually cannot be bought (and sold to make a profit). In the case of New Jersey, property development firm Roseland, owns a lot of the land on which the race will be run but it is thought not to be investing any money in the race.
High net worth investors who are fans of F1 put money into circuit development to get access to the paddock and to be seen to be associated with the sport they love. This is why they generally want to be publicly named as being an investor and there are plenty of examples to illustrate this.
Singaporean billionaire Ong Beng Seng is one of the biggest backers of his country's Grand Prix whilst beverages tycoon John Paul DeJoria invested in Austin's Circuit of the Americas. DeJoria doesn't keep it quiet that he is an F1 fan and when his investment was announced he said "my wife, Eloise, and I attended our first Formula One Grand Prix in 1995 with our good friend, the entertainer Cher...We were in Monaco, and Michael Schumacher won that year. I will never forget that experience and I've been in love with Formula One ever since. When I learned about the chance to bring F1 to Texas through a facility like Circuit of the Americas, I couldn't wait to be involved."
Given that these wealthy investors usually provide money to be publicly associated with an F1 project, New Jersey's race may not have this kind of backing since no names have been announced and the organisers refuse to say where their funding is coming from. Regardless, it is hard for high net worth investors to put money into a street race for the same reason as property developers - there are usually no tangible assets they can 'buy' because the circuit is on public roads.
This brings us to the third investor source for circuits which is government funding. Governments give financial assistance to all of the five F1 races on public roads, including Monaco which is exempt from paying an annual fee to host its race. There is good reason that governments are eager to fund street races.
With 515m viewers last year F1 is the world's most-watched annual sport and this gives tremendous exposure to its races. Having local landmarks in the background focuses viewers' attention on the destination just as much as the race itself and this promotion drives tourism. It also allows loyal fans to return to the track months after the race has finished and stay at the site of famous on-track tussles. Since the track is not a permanent facility no money is wasted on construction if the popularity of F1 wanes in the country and the government is not left with a white elephant if the organisers decide to quit when their contracts expire. Permanent circuits cost around $250m to build so they are a much bigger risk for governments to fund.
Neither New Jersey nor New York City need to drive tourism as they are already incredibly well-known. Accordingly, the promotion which would come through F1 is far from essential. This alone makes it unlikely that the Grand Prix of America would get government funding even though this is essential to the survival of every street race on F1's calendar. This principle isn't just restricted to F1 but is common across many series and countries across the world. Indeed, council funding was even granted to the lowly Formula 3000 Superprix, which was held from 1986 to 1990 on the streets of Birmingham.
The same principle would also apply to an F1 street race in London which already gets more than enough tourists. It is no coincidence that Ecclestone said he would make the rare exception of his F1 Group contributing money in order to make the race happen. This would most probably be essential to it taking place as it is unlikely that the government would provide funding whilst the public roads would provide a hurdle for investment from property developers or high net worth individuals because there would be no tangible assets for them to buy into.
There is little doubt that the Grand Prix of America would benefit tremendously if Ecclestone offered to make a financial contribution to the race. In fact, it is a widely-held belief that this is precisely what needs to be done to crack the US market. Given how well-known F1 is in the UK it seems absurd that such tremendous financial assistance would be offered to a race in London whilst one with the Manhattan skyline in the background gets none of it.
An alternative strategy could be for F1 to wait a few years in the hope that the race in Austin is a success and raises the profile of the sport in the US. If that happens then the state of New Jersey may be convinced to put up some of the money for the Grand Prix of America but even then this would be far from a racing certainty.