The Victorian Government's annual cash "investment" in the Australian Grand Prix in $millions (Source data: AGP Corp Annual Report 2013)

The ABC reported on Tuesday night that the long-term future of the Australian Grand Prix is in doubt (Controversy surrounds future of Melbourne Grand Prix). The Victorian Government is baulking at the high cost of the event at the same time as Formula One supremo Bernie Ecclestone is due in a German court on bribery charges.

The 2013 Annual Report of the Australian Grand Prix Corporation says last year’s Melbourne race cost the Victorian State budget a whopping $50.7 million. That was better than the $56.7 million in subsidy forked out in 2012, but still a very large sum for a long weekend.

The Victorian Government claims the subsidy is worth it because the annual economic benefits of the race are officially estimated at $32 million to $39 million. As with the East-West Link motorway (see here and here), no one in the Government appears to be unduly bothered that the cost exceeds the benefits by a significant margin!

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Yet the official estimate of benefits looks wildly over-stated. According to a high quality analysis of the 2012 Grand Prix prepared by consulting firm Economists at Large (see Is the Grand Prix really worth $60 million?), the economic benefits from factors like tourism, international media exposure and consumer surplus are only around $5 million.

At first glance that might seem too low given the Grand Prix gives Victoria plenty of television exposure within Australia and internationally. But that exposure has failed to translate into a significant increase in tourism.

As I noted this time last year, Sydney had a similar experience in the period after the Olympic Games. Giesecke and Madden say that in the three years immediately after 2000,

foreign willingness to pay for NSW tourism grew by an average 2.2 percentage points less than for Australia as a whole. Only by 2005/06 did the rate of growth in demand for NSW tourism match the Australian average. These results lend no support to the existence of an induced tourism effect.

Economists at Large also say that the Grand Prix generates additional economic costs like noise, traffic congestion, and the loss of access to Albert Park for eight weeks. These were valued at around $4 million in 2012.

So the economic costs cancel out most of the economic benefits; there’s virtually no pay-off for the $50 million State subsidy.

Notwithstanding it’s only one of 19 cities across the globe, some Victorians doubtless take pride in their capital city being part of the international Grand Prix calendar. A select few also get to enjoy the party. And the debut of Australian Daniel Ricciardo in the world champion Red Bull team at this weekend’s race adds to the event’s local appeal.

But circa $50 million is an extraordinary outlay for such a vague outcome. The fact that an unknown but significant proportion of the subsidy ends up in Mr Ecclestone’s pocket doesn’t make it any easier to swallow.

Absent a massive drop in the cost, there’s no rational case for continuing to fund the Grand Prix when the current contract expires. The subsidy is a very large sum of money; for example, it would be enough to fund the entire annual recurrent cost of three or four large high schools.

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Peter Fray
Peter Fray
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