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ESSA

The Australian F1 Grand Prix: Melbourne’s Economic Failure?


Aristidi Armstrong

By

March 31st, 2013


Aristidi Armstrong assesses whether the premium that Victoria pays for the ‘global branding’ and consumer spending that the F1 Grand Prix delivers really outweigh the tangible effects flowing from it.


The Pirelli was skirting once more at Albert Park, last week, as the 2013 Australian Grand Prix arrived on its yearly visit. The high-octane event has been carried out in Melbourne, ever since it was moved from Adelaide in 1996. However, it wasn’t just the rain which dampened some people’s enthusiasm for the event. As is increasing the case each year, the media and variety of parties with vested interests were steeped in debate over whether the F1 Grand Prix is in fact economically viable.

According to a report tabled in the State Parliament, the Victorian taxpayer is losing over US$34 million to the event; most of which, is going to president and CEO of F1 Management, Bernard Ecclestone, just for the right to host the event.[1]

That’s a lot of opportunity cost in government expenditure!

It has become a matter of such concern to some Melburnians, that a citizen’s action group called “Save Albert Park” (SAP) has been founded, with the sole purpose of relocating the Grand Prix. SAP claims the total cost of the 2013 Grand Prix, is much higher than what has been reported in parliament by the media. Once the government’s contribution, the subsidies from the Victorian Treasury, local government and Parks Victoria and sponsorship from government agencies is taken into account, SAP proclaims the actual drain on the state economy is $130 million. [2]

Of course, there are economic benefits flowing from hosting major events such as the Grand Prix. Increased consumption associated with the event is estimated to inject $32 – $39 million into the Victorian economy, according to the Minister for Tourism, Louise Asher. She also adds that there are intangible benefits, such as “global branding” and an increase in interstate and foreign tourism.

In 2011, Tourism Victoria released a report highlighting the benefits of the Grand Prix to Victoria. The report stated the state’s Gross State Product was increased by between $32.04 million and $39.34 million during the period in which the Grand Prix was held.[3] It also generated between 351 and 411 full-time equivalent jobs, according to the Department of Business and Innovation.

From the other side, SAP asserts that according to the Victorian Auditor-General’s peer-review cost benefit analysis of the Grand Prix, the event is a net loss to the state, apparently exceeding $60 million annually. His department’s report also stated that there is no evidence of extra tourists coming to Melbourne because of the Grand Prix.[4]

Then there are the negative externalities; the spill-overs which impinge on the aggregate welfare of Melburnian society. Firstly, the irritating noise of the colossal F1 engines screaming down the track can be heard within a 10 km radius of the city, given Albert Park’s proximity to the CBD. This has adverse effects on the neighbouring work environments, and it would not take a lot to envisage some sort of hindrance to business activities, to at least some extent. MacRobertson Girl’s High School has to close down for two days during the event, every year, as it would be simply futile to attempt to teach over the volume of the racers.

SAP conducted a survey of the surrounding businesses, and found that 50% of the traders in the City of Port Phillip experienced reduced amount of trades during the Grand Prix.[5] Business in local pubs increased, but according to the study, local eateries and shops supplying “necessities” suffered.[6] These negative externalities, coupled with the cost of the event, have tried a lot of Victorians’ patience.

So does the Grand Prix really lower the welfare of Victorian people? Would we better off allowing the race to move on to some grateful city in Asia, or indeed, back to Adelaide? If you ask the SAP, the answer is overwhelmingly, yes. The state government does not share this view, as Premier Napthine recently stated that he wants the event to stay in Melbourne for years to come. The Grand Prix Corporation’s contract with the Victorian government expires in 2015. It is rumoured that Mr. Ecclestone wants to extend that for another 50 years.[7] Whether you believe the event is economically beneficial or not, as long as both parties are willing, the Grand Prix seems here to stay.

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[1] The Sydney Morning Herald, Grand Suffers ‘suffers $34 million loss’, October 31, 2007, http://www.smh.com.au/news/NATIONAL/Grand-Prix-suffers-34-million-loss/2007/10/31/1193618940122.html  

[2] Save Albert Park, Postal Address: PO Box 1300, South Melbourne DC, Victoria, Australia 3205
Telephone: 61 3 9690 3855 ; Fax: 61 3 9690 3544 ; Email: saveap@bigpond.com

[3] FORMULA ONE AUSTRALIAN GRAND PRIX: BENEFITS TO VICTORIA Tourism Victoria, July 2011

Copyright State of Victoria 2010. Authorised by the Victorian Government.

Department of Business and Innovation.

121 Exhibition Street, Melbourne VIC 3000

Postal Address: PO Box 4509,

Melbourne VIC 3001.

[4] Victorian Auditor General’s Office: State Investment in Major Events, May 2007

[5] Economic Impact study by the National Institute of Economic and Industry Research (NIEIR), 2005.

[6] Save Albert Park, Postal Address: PO Box 1300, South Melbourne DC, Victoria, Australia 3205
Telephone: 61 3 9690 3855 ; Fax: 61 3 9690 3544 ; Email: saveap@bigpond.com

[7] http://www.theaustralian.com.au/news/breaking-news/ecclestone-wants-50-year-grand-prix-deal/story-fn3dxiwe-1226585662421

The views expressed within this article are those of the author and do not represent the views of the ESSA Committee or the Society's sponsors. Use of any content from this article should clearly attribute the work to the author and not to ESSA or its sponsors.

  • Christian

    There are also the positive externalities, extremely difficult to quantify such as the part of our community that loves the Grand Prix, that feel it adds something to Melbourne’s character, that enjoy the international exposure and attention, plus the petrol heads that love the sound of the F1 cars zipping around the track during Grand Prix week, and the attraction of driving on the track for the rest of the year when it is not being used for F1 racing.

    Problem is, these effects are near impossible to quantify and put a price on.

  • Aristidi Armstrong

    It is true that some ‘rev heads’ may enjoy the Grand Prix’s noises and the thrill of driving around Albert Park after the event has taken place. However, as you stated in your response, it is impossible to quantify this. By contrast, SAP has managed to quantify the negative affect on nearby businesses. This adds authority to the argument that the negative externalities outweigh the positive externalities, the latter being largely enjoyed only by a fringe culture of automobile and F1 enthusiasts.

  • Michael

    A well written piece Aristidi. Anyone who doubts the Grand Prix is welfare destroying needs to read the cost benefit analysis conducted recently by Economists-at-Large( http://www.ecolarge.com/work/blowout-a-cost-benefit-analysis-of-the-australian-grand-prix/)and present a strong, evidence based argument refuting it.

    • Chris Mitchell

      Wow Michael, the ‘rent a crowd’ of Save Albert Park (which at last count consisted of a dozen or so old age pensioners), commissioned a left leaning economics company to write a report….and you wonder why the majority of people think that Save Albert Park are an irrelevant joke.

      If you want to talk about subsidies, how much of a subsidy is the Save Albert Park group getting with their council offices? Someone needs to blow the lid on that rort

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