Financial performance of Formula One Australian Grand Prix (source: AGPC annual report 2015)
Financial performance of Formula One Australian Grand Prix (source: AGPC annual report 2015)

The preliminary events for the 2016 Formula One Rolex Australian Grand Prix start today so it’s time to reprise my annual commentary on this gigantic financial sink-hole.

Last year’s event cost $101.6 million to stage but only brought in $39.8 million in revenue. Thus the state Government provided a subsidy of $61.7 million – up modestly from $60.0 million in 2014 – so Victorians could enjoy Formula One practice, qualifying and racing over three days.

When he announced last year that the contract for the race has been extended to 2023, Premier Daniel Andrews was quoted as saying the most recent data showed an economic benefit of about $40 million plus invaluable international exposure through the race broadcast.

Even if that figure were correct (it’s not), it’s a long way short of the $60 million plus this year’s race is likely to cost the citizens of Victoria. And all of the cost is real money i.e. something else in the budget had to be given up for it.

The real cost of the grand prix is those other things that circa $60 million of actual money could be spent on each year to produce a tangible benefit for the citizens of Victoria e.g. schools.

The claimed $40 million of economic benefits isn’t even close to the correct figure. An evaluation of the 2005 event by the Victorian Auditor General found the costs significantly exceeded the benefits.

A more sophisticated analysis of the 2012 Grand Prix by consultants Economists at Large concluded the economic benefits from factors like tourism, international media exposure and consumer surplus are only worth around $5 million (see Is the Grand Prix really worth $60 million?).

The main problem is the key benefit – television exposure for Melbourne – fails to translate into a significant increase in tourism; it seems we’re paying for “advertising” that’s actually not working. That’s not unusual; the same thing happened to Sydney after the 2000 Olympics.

Another problem is the Grand Prix also imposes economic costs like noise, traffic congestion, and the loss of access to Albert Park for eight weeks. When these economic costs are summed, they cancel out all but circa $1 million of the already modest economic benefits.

The logic is the 2012 event generated $1.8 million in public and spectator consumer surplus; $1.9 million in increased visitation; and $0.25 million in induced tourism/media exposure. On the other hand, it also generated -$2.7 million in lost amenity at Albert Park; -$0.6 million in congestion; and -$0.3 million in noise impacts.

Circa $60 million is a huge amount to pay for around $1 million in net economic benefits. It arguably also buys a sense of city, state or national pride, but Melbourne is just one of 21 cities that will host a grand prix this year and one of the 71 that have hosted races since F1 began. Melbourne isn’t Monaco; it’s not that special.

The subsidy is enough, for example, to pay for the construction of three or four large high schools every year. The Minister for Tourism in South Australia said last year that Victoria’s expenditure on this single event exceeds his state’s entire tourism budget of $50 million.

This year will be the twenty first time the event’s been held at Albert Park in the modern era and 2020 will be the 25th anniversary. It’s already looking like one of those set-in-stone traditions that politicians feel must be saved from predators regardless of the cost.