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

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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