The Grand Prix is a screaming waste of money

ScreenHunter_1685 Mar. 14 09.20

By Rod Campbell, cross-posted with author permission from The Drum

It’s that time of the year again, when the high-pitched whining of Formula One cars can be heard across Melbourne.

It gets so loud sometimes that it almost overpowers the lower-pitched droning of all the economists who think it’s a bad idea.

Why can’t us economists just let Victorians enjoy the race in, er, peace?

We would if the Victorian Government would come up with a different reason for keeping it, such as a gift to lovers of motor sport. Or because they want to help out Bernie Ecclestone, who is in a bit of a tight spot at the moment. Or even just because they like it.

All of these reasons would be fine with economists, just don’t try to tell us that it is good for the Victorian economy.

The grand prix loses money. Lots of it. This isn’t new, it’s been happening since the beginning.

Taxpayers spent $58 million dollars on the race last year and $54 million the year before. No one suggests that future events would cost taxpayers any less.

So what do we get in return? According to Tourism Victoria, we get “media or advertising-equivalent value of $35.6 million,” which sounds pretty good as long as you don’t look too hard at how they got that figure.

Tourism Victoria’s figure is from a 2009 report that they commissioned, by UK media firm Comperio Research.

Comperio’s analysts endured watching 43 hours of grand prix coverage and timed how long each sponsor’s logo was on the screen for, including Melbourne and Victoria logos.

Then Comperio found out how long the race played for in all countries and guessed how much similar amounts of commercial advertising might cost.

“All countries” might be an exaggeration – North Korea doesn’t seem to be in there, but the petrol heads of Angola, Benin and Rwanda will be pleased to know that they were counted.

It is debatable how much it is worth to have our logos on the TV in Guinea-Bissau. What isn’t debatable is that Tourism Victoria misrepresented this report. Comperio make it clear its $35.6 million figure relates to the media value for all sponsors, while the value for Victoria and Melbourne is only $6 million.

OK, so they might have overstated how many Romanian and Nigerian tourists might come, but surely lots of other people come, right?

Sure. A 2011 Ernst and Young report commissioned by the Grand Prix Corporation estimated that 9,000 tourists came from overseas and 25,000 thousand from interstate.

For the money we lost on the grand prix – only $52 million that year – we could have given away airfares to more people and it would have cost half as much. If we assume a return airfare to Asia is $1500 and a domestic fare is $500, it would have cost only $26 million to fly all those people here. Besides, Qantas could use the money!

Even so, all those tourists do spend money, by Ernst and Young’s estimates about $34 million. But tourism expenditure isn’t free money – sorry to play the dismal scientist here.

Providing the goods and services these tourists demand also costs us money. Only the difference between what tourists pay for goods and services and how much it costs us to provide them is true economic benefit. Based on tourism industry margins, this benefit would be about $6 million.

So for our $50+ million dollar outlay we’re getting back tourism benefits of $6 million and “media values” of $6 million. (Tip to economics students – don’t include “media values” in your reports until after you’ve graduated.)

Then there’s other costs.

The race causes congestion and disruption around the circuit. It makes a lot of noise. Albert Park normally receives about 33,000 visits per week, which can’t happen at all during the week of the race and are affected for months either side.

All of these impacts are costs to Victorians.

So if you’re a petrol head and you love the grand prix, that’s fine. In fact we want you to like it, as it is our gift to you.

If you’re a Victorian politician (both flavours) and you want to keep the race because the lobbyists like using the corporate boxes, that’s OK too.

Just please stop telling us the grand prix is good for the economy. Then we could stop droning about economics and get on with whining about the noise.

Rod Campbell is a director of public interest economics group, Economists at Large.

25 Responses to “ “The Grand Prix is a screaming waste of money”

  1. Phil the engineer says:

    Formula 1 is an excellent investment in my Sunday afternoon/ evening entertainment.

    I couldn’t care less how much it costs.

    • migtronix says:

      I’ll take an economist seriously about wasting money when they say something about the costs of G20/G8 meetings…

    • Mik says:

      As a side note, how many of those overseas visitors now think that Melbourne has great price housing and buys up big here, 104 people buying 500,000 plus houses would equate to 52million in sales. that money then going into the hands of the sellers, surely this has a knock-on effect…lol

  2. migtronix says:

    Just please stop telling us the grand prix is good for the economy

    *cough* Negative Gearing *cough*

    *cough* FHBG *cough*

    *cough* G20 meetings *cough*

    Yeah the GP is the real productivity killing waste of money… Incidentally it is literally across Queens Rd from me and its actually much quieter than last year — now at the moment its just a single cars out so when they start really practise it will be different but its hardly all across Melbourne that you can hear it! The #@$%ing rubbish trucks that come past every morning are more noisy!

    • krazy.galah says:

      Haven’t you heard….. TURBOS are back. I am not at all qualified to know if this will make a significant difference with noise of course.

      I do remember being in Melbourne the first year it came to town and being able to hear it in Armadale. Mightily impressed I was.

      • migtronix says:

        I have heard! As I say it’s literally across the road from me and it wasn’t as bad this morning as 2 years ago, but when there’s more than 1 car on the track and they really start timing it will be deafening :)

      • General Disarray says:

        The turbo itself wouldn’t make a noticable different to the noise level, but this could;

        Rule change: Single exhaust with central exit
        Implications: The developments in exhaust technology over the past few years have led to terms such as ‘coanda effect’ and ‘blown diffusers’ becoming common parlance in the paddock. But these buzz phrases will disappear from common usage in 2014 thanks to the repositioning of the exhaust.

        No longer will designers be able to divert hot exhaust gases into the diffuser to gain downforce as the new regulations stipulate a single exhaust tailpipe that exits centrally behind the rear wheel centreline. This regulation change will hurt some teams more than others.

        Those who had mastered exhaust blowing will feel the downforce loss the most, whilst those who always struggled with the concept will breathe a sigh of relief.

        http://www.formula1.com/news/features/2014/1/15408.html

        That’s going to screw Redbull – downforce was their main advantage. The cars will definitely sound different and IMO these new rules will make for more interesting racing.

      • flyingfox says:

        Engines have moved from NA V8 to Turbo V6. Original plan was for 4 cylinder turbo engines to match what many manufacturers are putting in high end cars etc. But this got rejected because the 4C engines sounded nothing like F1. Apparently the new 6 C engines too are not as aural as their V8 counterparts.

      • flyingfox says:

        @GD

        Blown diffusers were made illegal a while back.

      • migtronix says:

        @GD thanks for that.

        Few cars out on track now and when they come past Waite corner it’s still pretty loud, but nothing like last year.

      • General Disarray says:

        @flyingfox

        Yes and no.

        http://www.formula1-dictionary.net/diffuser_blown.html

        The current exhaust takes all the tricks away – until they come up with something new :-)

      • Nudge says:

        Not in quite the same sporting class.
        When I raced my turbo rally car with a very open exhaust at Wakefield they didn’t even bother with a sound test. However they swarmed over others who didn’t have a hairdryer chopping up the exhaust pulses expecting them to go over the DB rating.

  3. TheJoneses says:

    Thank God its not in my city,

    V8 Super cars on Gold Coast every year is bad enough. Avoiding that circus AND schoolies makes a spring vacation on the GC problematic each year.

    • Jason says:

      Do yourself a favour and hit the Sunshine coast instead, it’s a lot nicer, less bogans, more homely feed.

      Unless your goal is to get your head kicked in by a shitfaced, tatted up Kiwi labourer, then yes go to the GC.

      • TheJoneses says:

        I hear ya.
        Surfers Paradise on a Friday night is like a set for one of the Mad Max films.
        We always stick to Coolangatta which is more family friendly.

        But if the Sunshine Coast had better airport and flight options we’d probably go there instead. C’mon Clive Palmer. Do your duty as a local politician and get some of that public infrastructure pork.
        I hear it tastes delicious.

  4. moderate mouse says:

    I went a few years back and my ears are still ringing! I spose we could model in some boost to the economy through future hearing aid sales (brought forward and NPV’d and all that) but not sure it would swing the ledger enough. Worth a look though surely.

    But seriously, bring it on. Turbo-hybrids this year….radical. And yes, quieter too…

  5. Jake Gittes says:

    Hasn’t the Vic govt already shown that the state’s population increase is due to the F1 coverage?

  6. Explorer says:

    Circuses!

    Probably driven by the number of TV viewers from Victoria who watch (what is the $ cost per viewer/voter).

    I understand that F1 and V8 supercars are two of only a few profitable motor racing franchises in the world.

    • Nudge says:

      Profitable at the expense of driving quite a few club level motorsports to virtual extinction. As I understand it, their bright spotlight sucked any sponsorship out of smaller events & put a lot of backyarders & small businesses – out of business.

      Familiar story in any sector I guess.

      • hamish says:

        I dislike street races for this very reason. Aside from losing out on ticket sales, money that could be spent on upgrading or developing permanent facilities that are used for the rest of the year by car clubs, driver training, manufacturer testing days, etc, is squandered on temporary facilities that cater only to the best funded categories in the sport.

        Plus, I think F1 at Phillip Island would look much better on TV than the Albert Park street circuit.

    • wycx says:

      I think NASCAR does ok with profitability.

  7. tslewis4 says:

    What a relief to read a sensible comment on the Melbourne Grand Prix. Thank you.

    As with business, this isn’t just another hole in the annual budget, it is also the opportunity costs. Imagine if that money were instead spent where it should be, helping out technology startups, as they are doing in London.

    What Australia really needs to decide is if it intends to be another try-hard, third-rate economy that pulls stunts like this to pretend it is first-rate (somehow), or if it is willing to put in the hard work to make it to being a reasonably good second-rate economy.

    Instead, we’re all going to get wealthy by selling each other houses, apparently. I’m sure that is going to work just fine. No, really.

  8. Liu Mianzhi says:

    Why, Bernie Ecclestone has sold Grand Prix to Sakhir, Spielberg and Yas Marina and by gum it put them on the map!

    Ah it’s not for you, it’s more of a Spa-Francorchamps idea…

    Victorian Government: “Now wait just a minute, we’re twice as smart as the people of Spa-Francorchamps. Just tell us your idea and we’ll vote for it!”

  9. ess_see says:

    Hi Rod,

    Can you elaborate on the tourism industry margins and how the tourist estimate is calculated to be $6 million?

    Have you considered the amount of fan merchandise the tourists purchase, and is the margin on this merchandise the same as ‘tourism industry margins’?

    Removing the cost to provide goods and services for the total tourist spend would seem to indicate profit?
    Would you also need to consider the amount of profit, especially of franchises and merchandise traders, being redirected to stakeholders outside the Victorian state?

    How about reduced state income due to GST refund scheme that international tourists can take advantage of?

    Surely considering the result is a significant over estimation in your $6 million value?

    -
    Ok, seriously now, can you please explain why this ‘true economic benefit’ is less the cost to provide?

    1. Some parts of costs to provide would go to labour and materials paid in Vic and thus benefit Vic economy?

    2. Parts of costs to provide that paid through to accounts outside Vic still benefit Vic economy as the gross tourist $ enabled this payment which in turn enable the trade in the Vic economy?

    3. Even profits moving to entities outside Vic is still enabling trading in Vic and justifying stakeholders investment in business in Vic?

    Sorry for so many questions and thanks for any clarification,
    Regards,
    SC