(Image source: Autoweek)
The recent announcement by the Victorian Government on its withdrawal from hosting the 2026 Commonwealth Games, less than three years out from the scheduled start, once again put into the spotlight the growing reluctance of cities around the world to hold major sporting events. The Olympics now see just one or two bids by the time the hosts are decided, and the record for the Commonwealth Games is even more dismal. Tales of wasteful spending, forced evictions, and brand-new infrastructure left to decay have deterred more and more cities from submitting or continuing their bids.
Meanwhile, having pulled out of the Commonwealth Games citing ballooning costs, the Victorian Government has been happy to pour millions of dollars each year into the Australian Grand Prix in Melbourne. $78.1 million, to be precise, was the subsidy given by the state government to the Australian Grand Prix Corporation (AGPC) to cover the gap between the cost and the revenue of the race organisers in 2022. Although it pales in comparison to the $6 billion cost ascribed to the now-scrapped Commonwealth Games, it is an illustration that governments are still eager to reach into their pockets for certain prestige events if they believe the benefits justify the costs. More than that, Formula One has seen a seemingly meteoric rise in cities expressing their interest to host a Grand Prix. The rise in popularity has been due to increasing audience and commercial interest in the sport, but just as importantly, hosting a Grand Prix is a very different deal to hosting the Olympics, Commonwealth Games or even the World Cup. Instead of a one-off, month-long event taking place across multiple venues (possibly in different cities) every four-or-so years, there are twenty-plus Grand Prix each year, each taking place over a single weekend and held at a different venue around the globe. One venue is usually contracted to run a Grand Prix annually over several years, and with only so many Grand Prix that can be held each year due to logistics, personnel requirements, and potential viewer fatigue (24 races are planned for 2024, which reaches the limit set by a commercial agreement between the commercial rights-holders and the ten competing teams), clinching a spot on the race calendar is no easy feat.
What sets the current venues vying for a place on the calendar apart from the existing races is that they are mostly cities that are offering their streets to be converted temporarily into a circuit for the Grand Prix. Many current races, especially those in Europe, take place at permanent circuits, often built some distance away from major population centres. It highlights the desire from cities around the world to use Formula One as a tool to promote themselves, and the cash they are willing to splash to do so. In fact, each race organiser must pay tens of millions of dollars to F1 management each year to host a race – a cost that has made it virtually impossible for private investors to organise a race without help from the government. Amidst such a frenzy across the globe, it is only fair to ask, much like with other sporting events – does hosting a race actually make economic sense?
Albert Park, home of the Australian Grand Prix since 1996 (Image source: Austadiums)
We can first turn to our very own Australian Grand Prix for a closer look. The Victorian Government justified its subsidy with a report estimating a $171 million increase in Gross State Product (GSP) and 734 full-time-equivalent jobs created. However, these numbers alone are insufficient to paint a full picture. Because these are the only available data points we have for 2022, we must dig further back to find the full picture. In 2013, Save Albert Park, an advocacy group dedicated to stopping motor racing at Albert Park, commissioned a report from a group named Economists At Large which purported to show that the 2012 Grand Prix generated a net economic loss of around $60 million. This was, however, based on a very different model to that used by the government’s report. Economists At Large used cost-benefit analysis (CBA), which aims to measure the welfare effects, which includes profit made by the organisers as well as consumer and business surpluses minus costs to the community such as congestion or inability to use the park. The government’s report aimed to measure the overall impact on the economy, presented as a change in GSP – in other words, all the extra expenditures and consumptions caused by the event.
Another illustration of the different analytical methods were the reviews undertaken after the 2005 Grand Prix, the 10th anniversary of the event at Albert Park. A report was produced by the state’s independent Auditor-General on government investment in major events, and two studies were commissioned specifically on the Grand Prix – one using CBA and one estimating the GSP increase using a different method. The CBA found a net economic loss of $6.7 million, while the GSP increase was estimated to be $101.8 million. This contrasted with a report commissioned by the AGPC and produced by the National Institute of Economic and industry Research (NIEIR), which found a GSP increase of $165.7 million. The report also found that several estimates used by the NIEIR were of dubious quality, such as the induced tourism effect, and that if those were not included, the GSP increase would be much lower at $62.4 million. This highlights the difficulty of obtaining precise estimates for the more indirect economic impacts and the conundrum this presents when crafting a total estimate – either the effect is ignored entirely, or a low-quality estimate is used, usually based on assumptions that cannot be proven. Neither of the options are desirable.
Of course, the state of the Grand Prix now is very different to when these studies were taken more than a decade ago. Between 2004 and 2008, around when the studies were taken, government subsidies rose from $12.25 million to $40 million, while revenue decreased from $51.05 million to $43.257 million. This was attributed to decreasing ticket sales, sponsorship and investment, and increasing operating costs. Now, attendance is at a record high and new sponsorship has come along, but the budget shortfall that the government has to cover has increased from pre-COVID times. No independent economic review has been completed since 2007, meaning we are in the dark about what all these changes mean for the Grand Prix. Successive governments from both major parties have simply upheld the status quo and avoided scrutinising the economics. We can only speculate as to why. Perhaps it’s the prestige factor – Melbourne remains one of only two dozen places around the world to host such an event – or perhaps it is fear that another Australian city would take over the Grand Prix if Melbourne was to drop it (Melbourne stole the title from Adelaide after all). Perhaps they believe cancelling the event would be unpopular, and they can stomach the cost in comparison to, say, the Commonwealth Games. Regardless of the reason, the Grand Prix is set to stay until at least 2037.
Victorian Government subsidy for the Australian Grand Prix since 2012. Note: no races were held in 2020 and 2021 due to COVID (Source: The Age)
So what lessons can we take out of this? The most important one is that estimating economic impact is a murky business – there’s simply too many factors that we don’t have a good reading on. With such an array of different models and estimates that all choose to include and exclude different things, it is hard to arrive at a conclusion on how much the Grand Prix has benefitted Melbourne and Victoria, if at all. The Auditor-General’s report recommended that large events such as the Grand Prix undertake both CBA and GSP analysis (using the same model as in the report), and concluded with a positive finding that “Major events have undoubtedly delivered economic value to Victoria”, though without specifying the Grand Prix in particular.
Unsurprisingly, people around the world have also tried to answer the same question as we did in Melbourne. The Melbourne race is relatively fortunate in that it has a steady place on the race calendar, being under contract continuously since 1996 and until at least 2037. Other cities have been much less fortunate. Istanbul held a Grand Prix from 2005 to 2011 before being dropped by F1 management due to poor attendance and lack of profitability (though it briefly returned to the calendar in 2020 and 2021 due to COVID restrictions in other host countries). A subsequent study found that no comprehensive economic analysis was made before the deal was signed. Rather, the government gave financial support for the race because they assumed the race would advertise the city and generate additional tourism, which did not materialise. The race used a purpose-built permanent circuit on the outskirts of Istanbul that soon came to be seen as a white elephant – Turkey did not have a strong motorsport heritage, and there were very few uses for the track after F1 stopped.
A study in 2017 attempted to use regression models to determine the economic impact of races across F1’s heartland in Europe, including historical circuits that have held plenty of races and lesser-known circuits that held races sporadically. The study found no positive effects on GDP, employment or tourism, and in fact found evidence of negative effects emerging after a three-to-four year lag, though it acknowledged it was difficult to explain this effect without further research. Nevertheless, it pointed to opportunity costs as the most obvious explanation – government subsidies for F1 could have affected its ability to develop other areas of the economy.
In more positive reviews, the Canadian Grand Prix in Montreal seems to do well in terms of economic impact, with one study estimating through a regression model that an additional day of F1 generates a 9% increase in foreign tourists for the month for the city. Another study asserts a 250% increase in tourists on the race weekend itself. However, the same study also explains that much of the economic benefit was directed to local political and economic elites, with very little benefit for the regular population. Nevertheless, in 2008 the organisers and the government decided not to continue the event because the sanctioning fee that had to be paid to F1 management had become prohibitive (though it returned in 2010 after negotiating a better deal).
Montreal, Canada (left) and Istanbul, Turkey (right) (Image source: Sky Sports F1)
Much like any major event, there is good reason to be sceptical about the economic benefits that holding a F1 race brings. But unlike the tales of economic and social woe that seemingly accompany the Olympics these days, figuring out the positive and negative economic impacts of hosting a race is tricky. In any case, perhaps it was never the economics that government officials were thinking about when they decide that they, too, want to host a F1 race. Perhaps it is the prestige and glamour that pushes them towards the difficult task of clinching a spot on the crowded race calendar. Perhaps they believe the image boost the city would receive will more than justify the costs. But it sure would be nice to see more efforts being put into studying the economics behind some of the world’s most well-known sporting events.
The CAINZ Digest is published by CAINZ, a student society affiliated with the Faculty of Business at the University of Melbourne. Opinions published are not necessarily those of the publishers, printers or editors. CAINZ and the University of Melbourne do not accept any responsibility for the accuracy of information contained in the publication.
