Financial Fair Play - the future of football
This site explores the issues surrounding Financial Fair Play (FFP) in football. Note: This site is not affiliated to UEFA.
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A study of Premier League club accounts shows that most paying fans effectively have their match-day-experience subsidised by club losses. The table below shows how much extra fans would have to pay for their match tickets if clubs worked on a Break Even basis, with fans making up any deficit.
Obviously the big 'Loss per ticket' figures are the ones that stand out – there probably wouldn’t be too many Liverpool or Man City fans who would continue to go to the game if every single ticket cost £27 and £83 more respectively. One could argue that fans of the biggest loss-making clubs have been getting tremendous value for money – a bit like regularly buying a ticket for your local theatre but getting to see Tom Hanks and Denzel Washington strut their stuff. Without the largesse of many Premier League owners (or their ability to add losses to the club debts), the talent on the pitch might be considerably less attractive.
There are only 6 clubs that have made a profit over the last two seasons for which we have a full set of accounts. Of these, Arsenal fairly regularly make a profit (essentially due to profit on player transfers). Arsenal were quick out of the blocks with their 2012/13 accounts and reported a pre-tax profit of £6.7m (this would bring down their ‘Profit per ticket’ to around £9.50 over the two seasons).
There are a few interesting anomalies in the figures. Newcastle’s huge profit of £33m in 2010/11 is largely due to the sale of Andy Carroll to Liverpool for £35m. Liverpool’s losses are mostly the result of the period of overspending under Dalgish and lack of Champions League income.
Manchester City are due to report their annual accounts for 2012/13 fairly soon and their loss-per-ticket figure seems set to improve. If the club reports losses at around the £60m mark (as some expect), the club subsidy figure would change to around £45 per ticket.
However you could argue that this is a fairly distorted view of club financing and ticket pricing. Whereas ticket income historically made up the lion’s share of club income, the picture has significantly changed. TV revenue and Commercial income have grown significantly and ticket income, although outpacing inflation, has fallen well behind the growth in the other income streams.
There are two measures coming into play that should change the current loss-making picture for clubs in the Premier League. Thanks to the BT deal, TV income will increase this season for every PL club by around £25m-£30m from the current season (2013/14). Crucially, despite the extra income, new spending constraints are now in place that restricts clubs’ ability to increase their wage bill. The two-thirds of the clubs with wages above £52m are now only able to increase wages by £4m a season (although clubs can exceed the £4m figure by the amount of uplift they generate from extra sponsorship, match-day income or player-transfer profits).
In future seasons, we should see many clubs regularly reporting modest profits and a ‘Profit-per-ticket’ figure should be the norm rather than the exception. The cry of ‘spend some money’ might even be heard at grounds other than the Emirates.
One of the most frustrating parts of the transfer window is finding that a player has been sold for 'an undisclosed fee'. Whereas some clubs are happy to disclose the amount that has been paid, increasingly clubs prefer to keep the figure confidential; hoping that it will somehow improve their future bargaining position or possibly avoid the wrath of their fans. As the Guardian reported, only 5 of 115 transfers made in the summer had an officially disclosed fee - a concept they felt was 'an insult to fans'. There has recently been a noticeable cultural shift towards more openness and transparency in football and the 'undisclosed fee' is clearly headed in the opposite direction.
Perhaps it is time for football clubs to consider the approach taken in Italy's Serie A. Diego Tari (@Tifbilanciato) from website http://tifosobilanciato.it/ recently made me aware of the information available to Italian supporters on their clubs. All Italian clubs are required to publish a list of the players at the club, together with the amount they paid for the player; their contract-end date, and their depreciated book value. Juventus published the following report as at 30 June 2013:
This level of information is intrinsically interesting - there probably aren't many football supporters who wouldn't be interested in reading a break-down of their club's players in this format. Interestingly, the figures in Juventus break-down are not 'round amounts'. I am advised this is largely because medical fees and legal fees are added to the purchase price (to represent the full cost of the purchase). N.B. Agent fees are not included in these figures.
As anyone interested in FFP will be aware, players purchase price is written-down over the life of the contract - this results in a rather mirky item appearing in the club' annual accounts termed 'amortisation'. Arsenal, for example reported amortisation costs of of over £41m in their 2012/13 accounts (but of course, we receive no breakdown of how this figure was derived). Interestingly, Manchester United used to the provide this level of information back in 2005 - however, for whatever reason they stopped producing it.
Italian clubs produce this information routinely and quite happily. This makes it easier for football fans to understand the club finances and unpick this mysterious amortisation figure. I would argue that having this information would really help the governance process within football. if Leeds or Portsmouth had published their squad in this format and detail, fans and journalists would have found it much easier to have challenged the clubs' lack of sustainability.
Perhaps calling for such a change isn't entirely fanciful. It is easy to forget that as recently as 2009, David Conn was bemoaning the lack of agent-fee disclosure in the Premier League. Now, every November, the Premier League routinely publishes how much clubs paid to agents. Publishing purchase price and contract information would be a fairly 'low cost' tool that would allow fans to better understand events and pressures at their football clubs.
Interestingly, Agent Fees aren't disclosed in Italy so perhaps both countries could learn from the best-practice examples of the other.
At the weekend, PSG became the first french team to field an all foreign line-up in a league game (in England this first happened with Chelsea in 1999). Their opponents Lyon fielded 7 french players and were hammered 4-0. This triggered inevitable debates about whether the scenario was a good thing, with 63% of respondents in one survey finding it 'shocking. However it looks like something they are going to have to get used to.
Off the field it has been an interesting week for the club. A senior delegation from PSG has met with UEFA officials in Switzerland to discuss the controversial Qatar Tourist Authority (QTA) deal. The PSG team, including the owner, the COO and his deputy, argued that the QTA cash should be regarded as legitimate revenue for the FFP Break Even test.
As I have outlined previously, the QTA deal appears to be artificially inflated and designed specifically to help the club Break Even. The owners of PSG are a company called QSI. QSI is owned by the Qatari government via a Sovereign Wealth Fund. QTA is a department of the Qatar government. The QTA deal is worth 105m euros in 2011/12 and 200m euros in 2012/13. The deal was agreed mid-way through the 2012/13 season and was backdated to a season prior to it being signed!
PSG's hopes of passing the Break Even test rests entirely on the inflated QTA deal. This, in turn, hinges on whether the deal is classed as a Related Party Transaction (RPT). If it is determined to be an RPT, then UEFA's CFCB panel will be required to assign a 'fair value' to the deal. If it isn't considered a RPT, then UEFA will not be able to amend the deal; PSG would sail through the FFP test.
PSG's owners, accountants and auditors are clearly arguing that the deal is not an RPT - they maintain that QSI and the QTA are completely separate entities and in no way 'Related'. However that isn't the end of the matter.
Related Party Transactions (RPTs)
An RPT occurs where an owner, or someone closely connected to the club owner, carries out a transaction with the club. RPT rules are important for FFP as they ensure the owner doesn't artificially inflate a transaction above 'fair value' in the aim of boosting the club's income. However, deciding when someone is a 'Related Party' or not is not always easy and can be subject to interpretation.
When the new Premier League spending constraints rules were introduced (they apply from the current 2013//14 season) a rather straight-forward approach to RPTs was introduced. An RPT is simply 'anything classified as an RPT in the club accounts' - if it isn't deemed to be an RPT by the club accountants and auditors, it isn't captured by the RPT rules. Although this might first appear to be a rather 'trusting' approach, in reality has the benefits of being both simple and secure. The UK accountancy and auditing standards are considered to be among the best in the world and the definition and handling of an RPT is contained within the Financial Reporting Standards which forms the accountancy 'rule-book',
UEFA, however, has chosen a different approach to RPTs. UEFA has a span of 54 countries, big and small, some in the EU and some not. Although EU countries would be required to comply with International Accounting Standards(IAS), non EU countries could use different standards. UEFA therefore wrote detailed RPT rules into the FFP. These rules (as was pointed out to me recently) appear to be almost identical to the IAS requirements. The rationale for standardisation seems, at least in part, driven by a concern that not all countries could be relied upon to have the same exacting standards. Interestingly, the ECA Vice President Umberto Gandini gave an interview where he indicated his belief that Russian auditing standards might not up to the job and were potentially very lenient.
Compliance with the FFP rules will judged by the independent CFCB panel (technically not part of UEFA). Crucially, the CFCB are able to decide that an item that was not originally classified as an RPT by the club and its auditors, is actually an RPT and requires an adjustment.
One might think 'rules are rules' and if both parties are working to the same rulebook the outcome will always the same. However, the definitions and meaning of concepts such as 'Influence' are always going to be open to interpretation.
For example, UEFA's FFP rules explain that a Related Party would exist where:
3 a The entity and the reporting entity are members of the same group (which means that each parent, subsidiary and fellow subsidiary is related to the others);
b) One entity is an associate or joint venture of the other entity (or an associate or joint venture of a member of a group of which the other entity is a member);
Given what we know about the relationship between PSG, their owners and QTA, it seems perfectly possible that (despite what PSG's accountants say) the CFCB would determine that there is some kind of related 'association' between the different bodies.
Of course this could all get contentious (and litigious). Interestingly, the CFCB was established as an independent body for this very purpose - UEFA itself is much less exposed to legal action if the rules and punishments are determined by separate and and independent body.
The benefits of forming such an independent body has precedents in the Premier League. In the famous the Tevez case, an independent panel set up by the FA decided that West Ham would be fined for failing to disclose a third party ownership contract - no points were deducted. An appeal was lodged and this second panel essentially determined that although they would have imposed a more severe punishment, due process had been followed by the first independent panel and the decision wasn't so 'perverse' that it had to be overruled. The FA were protected from any legal action by the use of the independent panel.
The point here is that the CFCB are able to make their own interpretation of what makes an RPT, and that might be different to one the club's auditors have come up with (as long as they don't decide something 'perverse). This week's meeting seems may turn out to be just first part of the long and winding RPT journey.
During the next two or three weeks Manchester City will publish their accounts for the 2012/13 season. Like several PL clubs with a bad set of results, City published their previous accounts on a Friday afternoon (when then knew journalistic attention would be kept to a minimum; a practice I highlighted here). Although I expect the accounts to improve, given that this forthcoming set of accounts will complete the FFP jigsaw it will be interesting to see if City repeat the practice this year.
UEFA's FFP rules require clubs to keep losses below 45m euros over two seasons (2011/12 an & 2012/3). The upcoming results will therefore complete the FFP picture and, in theory at least, we should be able to tell if the high-spending club have passed the test.
However, unless City have significantly changed their approach to financial disclosure, journalists are likely to struggle to determine whether City's results mean a Pass or Fail. The FFP rules are fairly complicated and a number of elements that are not shown separately in the accounts can be excluded from the Break Even test. In addition, City's previous accounts, whilst in keeping with permitted accounting practices, include some revenue and expense items that require adjustments to comply with the FFP requirements.
Although we can hope that City will produce a formal FFP statement as part of their accounts explaining their Break Even Result, past events suggest the club are more likely to produce an unhelpful but optimistic 'fudging' statement.
To help analysis of City's accounts, I have produced an interactive calculator (which unfortunately doesn't work too well on a mobile device).
Things to watch out for
City will aim to put as positive a spin as possible on the results so we can probably expect some 'window dressing' items in the account. It is possible that the club will repeat the 2011/12 accounts and again sell some unspecified 'Intellectual Property/Know How' to the club owners as a 'Related Party Transaction'. See Note 4 below for an explanation of how this needs to be treated.
Any significant change in club wages will need to be watched closely. Club wages were £201.8m in 2011/12 and we shouldn't expect them to reduce significantly (probably 10% maximum). The Independent reported that City were aiming to put some wage costs through a separate company as a way to help the club break even. However, even if the club do this, the FFP rules require all wages and costs to be included - ultimately UEFA would simply add any excluded wages back into the Break Even calculation.
When City's Loss (or Profit) Before Tax is announced simply input it into the orange box below. I expect the figure to be a Loss rather than a profit so enter a loss as a minus figure. I have pre-populated this orange field with the figure City probably need to hit to meet the FFP requirements in a 'best case' scenario. Just double-click on the field and enter the correct figure. Depending on the contents of City's accounts, you might only need to amend the orange cell to generate the likely FFP result.
Any yellow field can be overwritten if necessary. The Notes explain each item and why I have pre-populated the calculator with that figure.
Input City's Loss Before Tax as a minus figure in the 2012/13 cell. The 2011/12 figure should not be overwritten as it is the actual figure from the published accounts.
Club accounts do not breakdown all the figures that UEFA allows to be excluded from the Break Even test. However, last year, City announced that £15m could be excluded from their 2011/12 accounts. One of the permitted exclusions is for finance costs relating to fixed assets - this figure was listed as 'Depreciation' in the 2011/12 accounts (£6.6m). I have therefore apportioned the remaining £8.4m in 2011/12 on a 'best guess' basis to the permitted exclusions of Youth Development and Community Development. For 2012/13, key in the Depreciation figure (and any other expressly mentioned Finance costs relating to Fixed Assets if there are any). Unless the report mentions otherwise, another £8.4m split between Youth & Community is probably going to be about right. During the last year, City have spent heavily on the Academy development so the exclusion might be higher than the previous year (but if so, would expect this to be mentioned in the accounts).
UEFA will make a number of adjustments to allow for any overstated revenue items or understated expenditure items. Although I contend that Etihad could almost certainly have secured the same sponsorship deal for less (if it had wanted), the deal is so complicated that UEFA will struggle to apply a Fair Value reduction to this deal. It has also not been classed as a Related Party Transaction by the club accountants. Unless CFCB panel who oversee FFP compliance disagree, the figure can't be amended. Subsequent deals at other clubs have also brought the Etihad deal closer to a true commercial level and I have therefore assumed that there is no adjustment made by UEFA.
The 2011/12 accounts tell us that City were paid £12.8m by the club owners for Intellectual Property and Know How - the club have not disclosed what this 'Related Party Transaction' relates to. However, I am advised by an excellent source that this item probably wouldn't withstand a firm challenge if one were to be mounted. If you feel this will be challenged, you should enter the figure you think is an appropriate adjustment.
In the season immediately before FFP started (2010/11), Man City wrote-off £34.4m of player contracts. This had the effect of reducing the players Book Value (and Amortisation) to zero for future years.
Swiss Rambler believes Santa Cruz and Bridge are included in this figure. Although this 'write-down' is perfectly acceptable for accounting purposes, under the FFP rules a player technically has to be amortised evenly over the life of the contract (i.e. until the contract ceases to exist). Although UEFA would be able to adjust for this amount if it wished. Swiss Rambler believes this is unlikely as City could justify the treatment and they would not be considered to have 'taken the mickey' out of the FFP rules. If you believe an adjustment will be made by UEFA, enter 6.5m in each of the two seasons.
The 'Other' field may not be required - it will only been needed if City report income in the Profit and Loss account from a source that is not permitted under FFP rules (eg a gift to the club from the owner's family).
UEFA allows clubs to make an acceptable level of loss over the two seasons combined. The permitted € 45m was the equivalent to £38.48m in June 2010 when the rules were agreed but due to changes in the exchange rate was worth £36.69m as at the City's 31 May account cut-off in 2013. The FFP rules contain a provision that requires UEFA to look favourably on any club that fails due to exchange rate fluctuations. For all practical purposes City can make a good case for using the more lenient figure of £38.48m as their maximum permitted deficit.
Annex X is an appendix to the FFP rules that allows a club to deduct the value of the wages paid in the 2011/12 season to players on pre-June 2010 contracts. The exclusion can only be applied if the Break Even Deficit figure is improving. City previously advised that £80m of wages costs fell into this category. Although this seems rather high, I have left the £80m figure in the box. If you feel it should be a lower figure, amend it.
Although UEFA has published 9 punishments for clubs that fail the FFP test, it has not published a tariff to explain how the punishments will be applied. UEFA has intimated that clubs that exceed the threshold by more than 20% will face the more severe sanctions. Should City fail, they will find out their punishment at the end of April/start of May 2014.
Of FIFA’s 209 member countries, only 47 have reached the Word Cup Finals more than once in the last 30 years. The 5 African teams taking part in Brazil 2014, will be the same ones that took part in the 2010 Finals. Even with a World Cup made up of 32 countries, most of FIFA’s members have little realistic chance of qualification.
In response to member pressure, FIFA has taken steps to widen representation; both Blatter and his heir-apparent Platini have floated the idea of having 40 countries in a World Cup (potentially as soon as Russia 2018). Neither Platini nor Blatter will believe a bloated competition will be an improvement - however it will secure them all-important votes. Member countries are increasingly looking for a greater share of the FIFA revenue and are using their voting power to promote their interests. Despite our suspicions that Qatar was awarded the World Cup on the back of clandestine cash payments, we should recognise that the decision was at least partly the result of a desire to appease FIFA members and spread the World Cup glory into a new continent. Platini’s enlarged UEFA finals (from 16 to 24 in 2016) and his plan for a multi-host UEFA 2020 are part of the same political thrust.
So what next for FIFA? Although probably abhorrent to many, the next logical step may be to establish a ‘Rest of the World’ team in future World Cup Finals. There are some powerful political and financial reasons to suggest such an idea isn’t complete fantasy. It would be a way for up to 22 extra countries to feel part of the ultimate football celebration. Crucially, such a move would certainly drive up commercial revenue and TV Rights payments for the competition. Countries that will not be represented at this World Cup include populous countries such as China, India and Indonesia. Just a single player in a RoW team would generate huge interest in their respective nations. Given that the majority of FIFA’s members rarely reach the Finals, a push for a RoW team would probably not face as much opposition as traditionalists might hope. Depending on the make-up of a RoW squad, the concept could allow over 3billion extra people to feel that they had some national representation at the World Cup Finals. Currently only 26% of the planet have a country taking part in the Finals – a RoW team could push the interest level towards 80%.
How a RoW team might shape-up:
It is interesting to speculate about how a FIFA Rest of the World team could operate. Without enlarging the competition, it would probably only come about if Europe were to sacrifice one of its 13 slots. There would be a number of practicalities to address as regards representation. Players would probably only be eligible for the new team if they have never represented their country in a World Cup finals and if their country was also not taking part in the Finals.
Only a quarter of the World's 7bn people have a team at the Brazil Finals:
The manager would have to be appointed by FIFA and would probably take on the role for the short duration of the World Cup only (plus a couple of weeks prior to the start of the competition proper). This would potentially enable a high profile club manager to take on the task. Some players would inevitably choose not to make themselves available - giving up the 4-6 weeks required for the competition wouldn’t appeal to everyone. However the potential for commercial gain would be a significant incentive – there would also be considerable political pressure from some of the member associations for their players to take part.
Clearly the idea would face opposition and I have severe reservations about the idea*. However, it would appeal to so many of the vested interests within FIFA that we should not dismiss the concept out of hand. The idea does have some merits - after all, some terrific players, including Di Stefano, Best and Giggs never appeared in the World Cup Finals. There are certainly a number of financial and vested interests that might push for such a change. Perhaps we should start to get used to the concept of a World Cup with more World representation. All things considered, it might even be preferable to a 40 country World Cup.
*Although, if FIFA want to purchase the intellectual property rights, I will, of course, be happy to discuss further.
Nick Harris, writing in the Mail On Sunday, has delivered a rather nice scoop and discovered that any 'Fair Play Tax' will now be paid to charity, rather than be redistributed to Championship clubs.
The Fair Play Tax (FPT) was introduced to sanction clubs that overspend whilst gaining promotion to the Premier League. The FPT was designed as a deterrent so that clubs are less likely to spend heavily in an effort to get out of the Championship. The rules were announced by the Football League in April 2012 following a vote by the member clubs. Originally, any FPT was to be re-allocated to any clubs that stayed within the rules - the FPT was an added incentive to comply. However it now appears that the FPT will go to charity. The reasons for the change are unclear but this does seem rather harsh on the clubs that remain in the division and balance their books. The clubs certainly didn't vote for the FPT to be given to charity. However the FPT was always subject to ratification by the Premier League (as any club affected would be a PL member when the FPT tax was applied). Nick Harris advises that the change was made for 'political reasons' but frustratingly has been unable to find out more.
This change has significant implications. At an Isportconnect seminar last month Jez Moxey (Wolves) estimated that a third of the Championship would not stay within the FFP rules this season. He suggested that clubs might well push for the rules to be amended. If we assume 14 clubs manage to comply and that QPR's FPT is (for example) £35m, this works out to £2.5m each for the compliant clubs. To put this into perspective, Derby County receive around £5m in Match-Day Income each season and have recently sold naming rights to their stadium for £700k a season (goodbye Pride Park, hello "Ipro Stadium"). Given that the new rules also require the owners of clubs that lose more than £3m to inject equity into the club, I suspect very few will be happy with the news that the FPT will go to charity!
It is possible that the change may have been due to a desire to preserve the integrity of the Championship. Any unused portion of the parachute payments (c £37m if a club 'bounces back' immediately) is reallocated to the Championship clubs. If the FPT were included, there could be a significant incentive for a club to 'want' a club such as QPR to be promoted.
Although QPR's CEO Tony Fernandes rather disingenuously advised via twitter "QPR fans please ignore Article", other owners have been more open about the impact of FFP. Blackburn's MD Derek Shaw advised fans last month that the club is likely to receive a fine (if promoted) or a transfer embargo.
I have produced a graphic that explains how the Championship rules work (and the sanctions):
Note: The newly relegated clubs must comply with the FFP rules in full. During their first December in the Championship, a newly relegated club does not have to submit their accounts for the previous season (i.e. the accounts relating to the season when they were in the Premier League). However QPR, Reading and Wigan will need to submit their accounts for the 2013/14 season to the Football League (and will be hit with a sanction if their 2013/14 accounts show that losses exceeded the permitted thresholds).
BT's acquisition of the Broadcasting Rights for Champions League and Europa League football has significant implications for the English game. On the face of it, paying an increased sum for exclusive TV rights seems to be just an extension of current trends. However, when we look at the huge sums involved and calculate the financial impact on the clubs involved, it becomes clear that this deal will have far-reaching consequences.
To put this new deal in perspective, in 2011/12, UEFA received £906m in total for the TV rights for the Champions League (£735m) and Europa League (£171m). Of this, £144m (16%) came from England (£133m for CL and £11m for EL). Under the new deal, BT will pay UEFA £299m each year for both competitions.
Essentially, the process works as follows: UEFA receives income from TV rights and from Commercial sponsorship (such as Gazprom) and then redistributes most of it back to the competing clubs (keeping around 25% to distribute for football development across Europe and to pay their admin costs). A key element is the 'Market Pool', through which clubs receive a payment simply for taking part on the competition, determined by the percentage of all TV rights paid by their national TV companies. In 2012/13, whereas clubs from Russia each received around £5m as a Market Pool payment, English clubs received around £15m each. It is this Market Pool payment that will be most significantly increased as result of the new deal.
Before I show the extra cash that could be available to English CL clubs from 2015/16, we need to take out the Europa League element. Under the old Europa League deal, ITV pay around £11m for their rights. I have therefore assumed that BT managed to acquire their new exclusive rights for around twice that (£22m). Therefore, out of the £299m a year that BT will pay, I have assumed that £277m pa is for for the CL rights - this represents an increase of £143.7m pa over the old deal
The precise workings of the UEFA distribution model can change from year to year. However, there is a key constant: UEFA's most recent Financial Report (2011/12) confirms that consistently, 42.5% of UEFA's total TV rights for the CL are paid back to clubs as the Market Pool. Keeping this ratio, we can expect that out of the £143.7m uplift paid by BT each year, an additional £61.1 will be distributed back to the Market Pool. With 10% of this Pool allocated to Scottish clubs, this leaves an extra £55m for the English Champions League teams.
With 4 clubs taking part in the Champions League, this works out to an average of around £14m extra each year per club. This is a huge amount as can be seen from the total CL receipts the clubs would have received if the the deal had been in place for last season. Just getting to the Group Stage could deliver around £40m+ of income to the club.
This projection carries a significant number of caveats - however, the actual figures that the PL clubs receive are likely to be even higher - the extra BT cash and UEFA's increased commercial deals will help to push up the other elements of the distribution model. It is worth pointing out that the Europa League is a very poor substitute and will generate somewhere around £8-10m per annum per competing English club.
We need to put the figures into some kind of context to understand just how huge they are. Here are Aston Villa's turnover figures for the 2011/12 season:
Aston Villa received £33.6m from their combined Ticket Sales, Match-day income and Sponsorship for the season. This is significantly less than an English Champions League team would receive if it lost every game in the Group Stage. The uplift in income arising form the BT deal (around £14m on average) isn't far short of Villa's entire Ticket Sales and Match-day income. By way of another illustration, Liverpool's entire Match-Day income is around £42m a year.
With £40m+ available for getting into the Champions League, the stakes are raised significantly. There are currently 6 clubs that start each season with realistic expectations of securing a CL place - two will miss-out and few managers will probably survive the failure.
The clamour to secure a CL slot for the 2015/16 competition will extraordinarily intense.
The huge CL payments could well kill-off any remaining appeal of the FA Cup or League Cup for the top clubs. Why would a club fighting for a share of the £40m (and managerial survival), expend any energies on the FA Cup? Unless the distribution model changes we can fully expect to see FA Cup semi-finals with a clubs fielding weakened teams.
The figures are so huge that the difference between the 'haves' and 'have nots' may be considered simply too large for the general good of the Premier League. However CL clubs may well be resistant to sharing some of the money that they have 'earned' with their less successful peers.
There is, however, the interesting though unlikely potential of a change in the footballing order. Although it is an outside bet, if a club like Southampton or Everton were to secure a CL slot for 2015/16, they might be able to use their extra £40m to embed themselves as a CL regular. With the new spending constraint rules in place in the Premier League and UEFA's FFP rules, even historically wealthy clubs and those with a wealthy benefactor are going to find it difficult to displace an entrenched Champions League club. Any club not on the 4-seater Champions League bus in 2015/16 will seriously struggle to catch up.
For Spurs and Liverpool, the stakes are raised and many fans may feel it is a case of 'now or never'. For Manchester United, this is certainly not the time to have any post-Ferguson wobbles. Indeed, history might look back on Manchester United and conclude that his greatest failing was to retire two years too early.
Manchester City boss Manuel Pellegrini is set to take advantage of new legislation in Guernsey to reduce his UK tax bill. A press release today announced that Pellegrini is one of the first high-profile individuals to seek to use the new Channel Islands tax loop-hole - a move that could see him save up to £500k a year in tax.
The concept of Image Rights was originally established to ensure people in the public eye are able to control the use of their image and receive adequate remuneration for its use. Film stars or top sports stars increasingly wanted to receive payment for use of their image on publicity material and have a say in how their image was used. However, the concept and use of 'Image Rights' has moved-on and has been used as a vehicle for extremely wealthy people to avoid paying tax. Even though few people are likely to want to pay large sums of money to put a photo of Pellegrini on their products, the Image Rights loop-hole can be used to avoid paying a significant amount of tax.
It seems that Pellegrini will ask Manchester City to pay a proportion of his reported £5m annual wages into the new Guernsey company. Although we don't know what percentage Pellegrini plans to earmark for income derived solely from his 'Image', other sports stars have reportedly allocated 20% of their income to their Image. Rather than pay 50% tax on this income, his wages will be paid 'un-taxed' into the new company. As Guernsey does not charge Corporation Tax on these companies if they are held by a non-resident, Pellegrini will be able to pay himself a tax-free 'dividend' from the company.
Interestingly, this arrangement will also generate material savings for Manchester City - salaries paid to Pellegrini's Guernsey vehicle require no National Insurance contributions to be made.
The main benefits of the scheme are outlined on Guernsey solictors Silverman Shirliker's website:
One of the potential advantages of looking to Guernsey for image rights protection is certainly the tax benefits. Guernsey-based companies are endorsing the structuring of royalties for commercial image use through a Guernsey-incorporated company. Any profits or royalties derived from image rights can be paid into the Guernsey company to gain the maximum tax benefits. As long as the individual concerned is not a Guernsey resident, the income will not be subject to income tax, local taxes, inheritance tax and other death taxes, VAT, GST, indirect taxes and capital transfers. Moreover, corporation tax is charged at a rate of zero percent. A direct comparison with the UK demonstrates the extent of the tax savings, where HM Revenue & Customs could claim up to 50 percent as income tax.
Pellegrini's valuable image
Worryingly for British tax-payers and HMRC, we may see more clubs and other well-paid sports stars trying to avoid paying tax via Guernsey's new Image Rights set-up. Wages are the biggest single drain on club finances and in the drive to balance their books in a post FFP world, we might see others go down this route. Indeed, the Tax advantages are potentially so large for club and employee, that, in future, players and managers may be happy to reduce their nominal salary level in return for a the club paying into their tax-free off-shore Guernsey company.
Clearly, Pellegrini is not seeking to do anything illegal and some will may applaud the ingenuity of his accountant. However, others will argue that there is a moral issue for the Pellegrini and Manchester City to address. Both City and Pellegrini will gain from this arrangement - however some will point out that the nation's schools and hospitals etcwill lose out. Perhaps it is time to question whether football clubs such as Manchester City should be complicit in helping themselves and their employees avoid tax in this way. I should point out that practice isn't materially new and numerous other clubs have also been willing to help their employees in this way (Sol Cambell's claim for unpaid Image Rights payments almost pushed Portsmouth into extinction). However, this loop-hole could be fairly easily be closed if clubs refused to play-ball - very few regular, non-sporting employers would be willing to help tax avoidance via Image Payments. Given the current financial plight of the UK, perhaps the Premier League has a role to play by ensuring member football clubs stop tax avoidance via off-shore Image Rights vehicles.
Ian Cowie of The Telegraph produced this informative piece on the issue and process a few years ago.
All is not well with Turkish football and last week the Istanbul Stock Exchange regulators warned the ‘big 4’ (Galatasaray, Besiktas, Fenerbahce and Trabzonspor) that they must take immediate action to improve their finances.
The Stock Exchange is concerned that all four clubs have short term debts that exceed their revenue – essentially they are severely short of working capital. There are therefore some doubts about whether the clubs should be considered a 'going concern'. In order to remain listed on the Istanbul Stock Exchange, independent auditors are required to confirm that the clubs are a solvent and this statement from the Board is very much a warning to the clubs to act quickly to resolve their financial position. Besiktas and Trabzonspor have, so far, only received a conditional approval from the auditor. Fenerbahce's problems seem less severe than the other three clubs as they plan to raise funds via a share-issue for a retail company that they own (Fenerium).
The regulators also pointed to large foreign-currency exposure of Besiktas and Galatasaray (the result of player purchases in currencies outside of the Turkish Lira). The clubs are committed to making further instalment payments on players already on their books and are dangerously exposed to exchange rates and the currently-falling Turkish Lira. Galatasaray, for example, owe around 288m Turkish Lira – back in June, one Lira bought around 0.42 Euros but now it only buys 0.35 euros. This has added around 17m Euros to the amount Galatasaray is committed to paying.
There are currently other off-the-field issues affecting Turkish football. Besiktas and Fenerbache are banned from European competition for this season for match-fixing (with Fenerbahce also banned for next season). Trabzonspor have started their Europa League campaign well but have had their UEFA prize money withheld having failed to prove that they have no’ overdue payables’ (i.e. tax, wages, transfer fees). The situation is serious for Trabzonspor as the Turkish Tax authorities have recently publicly lodged that the club owes tax dating back to 2012 for around £4.1m. The club had previously maintained that the issue of ‘overdue payables’ related to a player-transfer that is now resolved. There seems every chance that the club could be banned from future UEFA competition under FFP’s Overdue Payable rules (as happened recently to Spanish club Malaga).
I have attached the Profit and Loss account for Galatasaray for the last two seasons. I am very grateful to Luca Marotta of http://luckmar.blogspot.it/ for pulling this together and helping with this article. Luca produces in-depth analysis on many clubs, including an in-depth analysis of Galatasaray’s accounts.
Although Galatasaray have lost more than the maximum permitted E45m (£38m) before tax over the two seasons, it is very likely that, owing to exclusions (youth/community spend, infrastructure financing and certain wages), the club would be within the FFP Break-even limits. However Gala will be mindful that there is more to FFP compliance than the ‘Break-even’ and ‘overdue payables’ and the club will also need to comply with the following before it receives a UEFA licence for next season:
1. Club is a ‘going-concern’
2. Club negative equity is not growing
3. Owners inject equity to cover losses
The club auditors are required to confirm the club is a ‘going concern’ and, although Gala will almost certainly secure this, the Stock Exchange warning is worrying (especially as they have highlighted that short-term liabilities exceed the club’s revenue). This financial indicator is, in itself, a key factor in suggesting that a business may not be a ‘going concern’. However, as the club can almost certainly demonstrate that there is no immediate threat of liquidation, it should safely be able to meet this criteria.
There is also an issue over growing negative equity at the club. This is a rather complicated area but essentially a club is able to revalue existing assets to help meet this criteria. Galatasaray, have revalued existing player contracts which has reduced their negative equity – the Istanbul Stock Exchange is clearly unhappy that the club have taken this approach (and it is unclear what UEFA will make of this approach).
The requirement to inject equity to cover club losses could prove the stumbling-block for Galatasary’s application to take part in UEFA competition next season. The club’s owners will need to inject around £40m of equity before the end of December this year to meet the FFP rules. With the club’s plans for a share issue blocked by the Istanbul Stock Exchange, it is unclear where these funds will come from (and without the injection, the club would probably not receive a licence).
Longer-term, the club's business model seems rather precarious - during 2012/13 Galatasaray received 24.8m euros from their successful Champions League campaign where they made the quarter-finals. Only one club automatically enters the lucrative Group Stage from Turkey and the club's average start has led to the sacking of manager Terim after only a handful of games.
You might wish to read my previous article on Galatasaray’s FFP issues
Note: The negative equity, equity injection and Break-even aspect of FFP rules will be tested for the first time during this season’s licencing assessment (i.e. license applications for entry into competitions starting in 2014/15 will be assessed during 2013/14). During 2013/14, club financial performance during the 2011/12 and 2012/13 seasons will be assessed to see if the FFP criteria has been met. The Overdue Payable aspect of the rules are not subject to a review of a two-season-long Monitoring Period – hence clubs have already been punished under this section of the FFP rules.
Immediately after last night’s set of rather predictable Champions League results the excellent Nick Harris from www.sportingintelligence.com tweeted an interesting comment on FFP’s impact on the Champions league. Nick made a very valid point in that the gap between the elite European clubs and ‘the rest’ appears to be widening:
This is an interesting point and raises a number of issues which are worth exploring (including the reasons behind this inequality, and the role of FFP).
Although many would like to see a more exciting Champion League, UEFA’s FFP rules were never intended to make football more competitive. The FFP rules are intended to bring greater stability and sustainability to European Football. With a number of clubs getting into financial difficulty and overspending to chase success, UEFA is aiming to reduce insolvency events and ensure clubs balance their incomings with their outgoings. FFP is aimed at ensuring clubs balance their books, rather than making it more competitive. Clubs with larger incomes will always be able to spend the most money on players - although this might viewed as somehow ‘unfair’, it is something FFP was never intended to address. Indeed, it appears to be an inequality of income, rather than a restriction on club’s ability to spend, that is the underlying reason for a lack of competition.
Essentially, there are three main factors that contribute to this inequality of income.
Champions League income
One of the biggest causes of inequality between Champions League clubs is the UEFA distribution of the prize money.
Although clubs receive more revenue the further they progress in the competition, a significant component is the ‘TV Pool’. This element is essentially based on the TV revenue received from the relevant countries, split between the number of clubs competing for that country. Unfortunately this means that the larger the country’s population, the higher the revenue for their clubs. FC Braga from Portugal (population 10.5m and in the grips of economic austerity), received only 1.5m from the TV Pool, compared to Man City ( England population 53m) who received £18.7m). Clubs from countries with lower population such as Netherlands (16.7m) or Czech Republic (10.5m) will always continue to receive lower TV Pool payments. This, in turn, becomes self-fulfilling and the clubs from smaller countries are less likely to succeed in the competition and reap the financial rewards.
TV revenue (excluding UEFA payments)
A country’s population is a key factor in determining the amount of TV revenue it can receive. For example, Ajax’s last accounts show that they received around £24m from TV revenue), compared to the £65m that Liverpool received. Increasingly, overseas TV rights are becoming increasingly important. The inequality of TV deals can be seen as self-fulfilling - overseas fans will pay a premium to watch the talent on offer in the Premier League and would pay far less to watch the Dutch Eerste Divisie.
With the increased globalisation of football, the top tier of clubs are increasingly able to write significantly larger deals than their peers. Two factors are at play here; top clubs have become very effective at securing multiple sponsorship deals from around the globe; brands will pay a premium to be associated with the very top clubs. In revenue terms, this is widening the gap between to elite clubs and the rest.
The three factors outlined above can be illustrated using the example of Celtic and Man City:
Celtic, like other top Dutch, Portuguese, Belgium, Czech, Scandinavian clubs, are severely hampered by coming from a country with a low population.
The FFP rules should stop clubs overspending to achieve footballing success. In theory this should restrict clubs ability to post large losses in the hope of breaking into the elite. It should also restrict clubs being able to rely on a benefactor to fund club losses*. This has certainly restricted Manchester City and Chelsea’s ability to spend freely to buy success – although whether this makes for a less competitive or less interesting Champions League is open to debate.
*Paris Saint-Germain have pretty-much ridden roughshod over the rules and haven’t allowed FFP to restrict their spending – they are likely to receive their punishment in April 2014. One of last night’s results was the thrashing of Olympiakos by PSG. You could argue that in a true post-FFP world, such a result is less likely.
Back in May I wrote an article about Arsenal's link with the deforestation company HAGL in Vietnam.
The pressure group Global Witness has increased the pressure on Arsenal to sever their links with company. BBC London's Sara Orchard produced an report on this issue.
In February I published a scaled version of the Premier League table which also showed wages paid on the same scale as points earned. The table gave an interesting perspective on which clubs were over and under-performing. I have now updated the table to show the end-of-season position*.
The red and green lines have beedn drawn to highlight the performances that seem to be the most interesting. Whereas the February table gave a good indication of performance, the final table is less satisfying. The table appears stretched at the top end and club are bunched together at the bottom end of the table. This occurs for two main reasons; although most clubs paid wages of around the £40-70m, a few clubs paid significantly higher wages of £170m+. Similarly, the league table is also distorted (largely as a result of Man United's over-performance together with QPR poor showing). Interestingly, the table does clearly illustrate how generally uncompetitive the league was last season, with just 7 clubs in the top half of the scaled table (and the rest well behind).
I have also attached similarly scaled tables for the two previous seasons.
Over the three seasons, Manchester United (Ferguson) ,Tottenham (Redknapp/Villas Boas) and Everton's (David Moyes) performance stands out - in this model, they are the only teams to out-perform their wage spend in each of the last three seasons. It is also interesting to see that although consistently the best team in the Premier League long-term, in recent years, Manchester United have been only the third highest wage-paying team. Interestingly, the only managers to survive an under-performance (a red line) is Mancini in 2010/11 (when City won the FA Cup). Tellingly, Mancini did not survive a second 'red line performance' during the 2012/13 season. Dalglish became manager at Liverpool midway through the in 2011/12 season and was sacked at the end of the club's 2011/12 under-performance. Based on the chart, Rodger's performance last season was fairly flat (although there are indications that things may be changing with a stronger second-half showing reversing a negative performance in the first half of the season).
As we would expect, there is a fairly clear link between wage spend and points achieved. From next season new financial constraint rules will be in place in the Premier League. The rules restrict a club's ability to increase their annual wage bill wage. Any club paying over £52m in wages cannot increase their wage bill by more than £4m a season. However the rules allow clubs to increase wage spend if they write new commercial deasl (in which case they can increase their wages by the amount of the uplift). These rules will prevent a repeat of the QPR 'project' but will reinforce the status quo - for example Hull City would face a probably points deduction if they decided to match Liverpool's wages next season.
*The 2010/11 and 2011/12 charts are based on the figures reported in the club accounts. We will not know the actual wages for the 2012/13 season for another 9 months so the figures are therefore based on the previous season's figures, adjusted for known events (eg QPR's increased 2012/13 spending). The actual figures are unlikely to be too far adrift from the 2012/13 chart.
When FFP was first introduced, most people wondered what loop-holes high-spending clubs would find to get round the rules. Now that we have seen the first published accounts for the first FFP season (2011/12), we have a much better idea about the various options clubs might use.
UEFA are very serious about the analysis of the club accounts and are using accountants, largely from the top two firms, to check accounts for any clubs using non-authorised techniques to help them Break Even.
I have attached a list of the techniques I have seen so far and recommend you read the list whilst listening to the audio from the seminar I gave at Birckbeck (University of London) recently. The audio can be accessed here 58.40mins in.
The loop-holes outlined in this presentation/article are all ones the auditing accountants are aware of and are lined up to spot. Where a non-standard practice is used, the accountants will submit an impact assessments to UEFA's Control Body.
Please note that in the audio, I refer several times to the Club Financial Control Board (it is of course the Club Financial Control Body)
uPure Related Party transaction e.g. PSG sponsor
As a post script to this article, I have since become aware of a further potential loop-hole that seems to have been used by some Ukrainian and Russian teams - 'artificial timing of the Euro exchange rate'. UEFA's Break Even limits are all denominated in euros and where the exchange rate fluctuates over the year, a club may decide to choose an incorrect transaction date (i.e. on where the exchange rate is the most favourable). Again, this should be picked up the accountants.
The 2013/14 season is a watershed for financial constraint in football. For the first time, all English professional divisions have rules in place that restrict their spending. The restrictions are summarised in the attached table. This table and an accompanying article appears in the latest August edition of When Saturday Comes magazine (Brazil cover). I also presented this at a recent seminar on FFP at Birkbeck college (University of London).
Note to editors, the above table (or variants based on it) cannot be reproduced without permission.
On the face of it, this might appear to have been an expensive summer for Man City; they have just sold Tevez at a £35m loss and have recently spent £50m on Fernandinho and Navaz. Football fans might follow the narrative that says that Man City are 'laughing in the face of FFP'. However, owing to the way football finances operate, the reality is somewhat different.
When judging whether a team has made a profit or loss for the season, transfers fees are spread out over the duration of the contract. So Tevez, signed for around £45m on a 5-year deal in 2009 (4 years ago), would be accounted for as an expense of £9m a season (£45m ÷ 5 = £9m) each season until now. Consequently, the transfer of Tevez actually 'saves' City £9m this coming season as they don't incur a further £9m depreciation cost (termed amortisation).
Following the initial legal challenge to FFP in May by Daniel Striani via sports lawyer Dupont, a second legal challenge has been raised. I have attached the Press Release in full with attachments:
Striani opens second front on legal challenge to UEFA’s break-even rule
- Belgian player agent Daniel Striani is continuing his challenge of UEFA’s Financial Fair Play rule today by launching a legal action in the Court of First Instance in Brussels. The process will ask the Court to judge on alleged infringements of both EU competition law and the right to free movement (of workers, services and capital).
This latest legal challenge follows a complaint Striani lodged with the European Commission in May against UEFA’s Financial Fair Play which argued that the "Break-even rule" (the obligation for financial equilibrium) was in contravention to fundamental principles of EU competition law. That process is ongoing and the Commission is expected to rule in 2014.
Striani’s legal team is led by Jean-Louis Dupont, the Belgian sports competition lawyer, who was part of the legal team that secured the Bosman ruling on player contracts in 1995. He also led the Meca-Medina case and, for G-14, the Charleroi case.
Since UEFA’s rule affects all football clubs, players and staff within the European Union, Striani is arguing that the Court of First Instance of Brussels seeks from the European Union Court of Justice a preliminary ruling on its compatibility with EU law (specifically free movement of workers, services, capital, and free competition).
Striani’s case argues that the UEFA rule is illegal under EU law because it is a disproportionate response and that there are more effective alternatives such as allowing over-spending if fully guaranteed; establish a "luxury tax"; or change the model of revenue sharing with regards to the UEFA club competitions.
This latest legal process is supported by a growing body of economic and legal opinion which argues that the UEFA rule is ineffective, illegal and disproportionate given alternative measures available.
Notes to editor:
1. Daniel Striani lodged his complaint about UEFA’s Financial Fair Play regulations with the European Commission on 6 May 2013.
2. For further economic and legal analysis supporting Striani’s case please go to:
Football’s Anti-Competitive Streak, Wall St Journal Europe, 25 March 2013 –
The Problem with Salary Caps Under EU Law: The Case Against Financial Fair Play, Texas Review of Entertainment & Sports Law, 15 November 2010, by Johan Lindholm
Financial Fair Play, alternative instruments and competitive balance, 27 February 2013, by Jeroen Schokkaert.
French football is currently agonising over how to deal with newly promoted AS Monaco – a club backed by Russian potash billionaire Dmitri Rybolvlev which has recently embarked on some headline-grabbing spending (including Falcao for a reported E50m and Victor Valdes).
The independent principality of Monaco has a population of around 36,000 and has separate tax laws to France. Although French nationals pay the same rate of tax as in France, overseas players living in Monaco (other than American players) will pay zero tax.
Faced with Monaco’s ambition, French clubs have questioned whether this gives Monaco an unfair advantage. The response from the French Football League (LFP) has been to give Monaco an ultimatum – either they move their headquarters to France by June 2014 (and come under French tax laws), or they will be ejected from Ligue 1. Understandably, Monaco have objected strongly and commenced legal action. During a meeting to find a way through the impasse, the French FA (FFF) ended up mired in controversy; both Monaco and the FFF claimed the other party had suggested that Monaco could pay €200m to make the problem go away.
The French papers have published a great deal of legal opinions on the deadlock – most seem to agree that the LFP would lose their case if it ever came to court. Interestingly, one view is that UEFA’s own rules actually help Monaco; in 2011 French club Evian tried to re-locate to a stadium in nearby Geneva (Switzerland) –UEFA refused to sanction the change, stating that the club’s ground and registered location need to be in the same place.
Playing in such a small country, Monaco’s gates are small - they haven’t exceeded average crowds above 11,000 for over 15 years (and attendances have been around 5,500 in Ligue 2 this season). Some make the argument that Monaco are therefore disadvantaged, compared to the bigger clubs such as Olympic Marseilles and PSG (who get around 33,000 and 43,000 respectively). It is worth looking at the club finances for Monaco and Marseilles during 2011/12 (when Monaco had their first season in Ligue 2).
Source LFP Report
Marseilles received €18m in gate receipts (compared to just €0.5m at Monaco). Looking at the wages that Monaco paid, it seems likely that the benefit from paying zero tax on overseas players' wages amounts to somewhere between €5 and €10m a season. In 2011/12, Monaco had gates of around 5,000 and these would ordinarily be expected to double following promotion. However their gate-receipt income is very low. Compared to their aspirational peers their low gate receipts wasn't fully compensated by the benefits of paying zero tax on some wages. However, this might now change given the club's current spending campaign.
To add to a rather mirky picture, the French government have announced that they intend to introduce a 75% tax on anyone earning more than €1m a year (i.e. a footballer on €20k pw). The implementation of this tax is still somewhat in doubt but would require the tax to be paid by the company paying the wages (i.e. the club, rather than the player). This tax would have significant impact of FFP and would also materially increase the advantages for AS Monaco
However, even with these advantages, Monaco are simply too small in their current form to comply with the FFP Break Even requirements if they continue to spend heavily. To overcome this, Monaco have launched a vision of their future that has been outlined by Gabriele Marcotti in a ‘Beyond the Pitch’ podcast – see 23mins in). Marcotti explains that Monaco plan to become an 'aspirational, boutique brand’ – they intend to create approximately 6,000 VERY high quality, luxury seats for which wealthy Monaco residents would pay around €2000 a game. The club would also create some premium seating, with tickets at around €200 a game. The remaining 6,000 tickets would go to existing fans at around the current rates.
There are probably few people who can envisage the ’boutique’ plan working – however, perhaps that doesn't matter at the moment. Monaco have a plan (however ill conceived and unlikely) and it seems they will be pushing forward on this basis and simply hope that UEFA or the political climate changes. After all, the Dupont legal challenge is still ongoing and any UEFA punishment for overspending wouldn't affect Monaco until December 2014 at the earliest.
In the mean-time, Marseille are feeling squeezed and are distinctly unhappy about the situation – as their President Lebrune outlined "[Marseille] must try to consolidate our place on the podium without the means of the Russians at Monaco (owned by billionaire Dmitry Rybolovlev)".
On the eve of the Champions League, Michel Platini gave an extended interview to the Mail’s Martin Samuel. Samuel has long been an outspoken critic of FFP and certainly put the UEFA head on the spot. Platini was left to struggling to justify some elements of FFP (although, as Platini pointed out, English isn't his first language). The full transcript of the interview really is an excellent read – click here.
Following Bayern’s win, a number of football pundits suggested that FFP would make it impossible for teams like Borussia Dortmund to challenge in future (one of Martin Samuel’s lines of debate). On the day after the final, Richard Whittall (@RWhittall), Toronto-based editor of the Counter Attack blog, published a terrific article outlining the counter-argument. Again, I can heartily recommend it to anyone interested in debate on how FFP will shape football.
And, to join up the three articles, it is well-worth reading a piece by Zach Slaton. One of the issues that Samuel raises with Platini is the impact that the vast Champions League revenue continues to have on football. Clubs that routinely qualify for the group stage of the Champions League can usually expect to receive around £25m+. Over time this distorts competition in the domestic leagues and tends to perpetuate a position whereby the big clubs continue to prosper and dominate their league. Sports statistician Zach Slaton (@the_number_game) analyses the impact that an annual play-off for the league title would have had in the Premier League. Slaton explains; "If UEFA and any of its constituent national federations and leagues want to find a less intrusive way to inject less predictability into league outcomes, perhaps they should start with a playoff instead". Click here to read the article.
A campaign is underway to force Arsenal to examine their links with controversial Vietnamese logging and rubber company HAGL.
Money-spinning end-of-season foreign tours to exotic places are now common-place for Premier League clubs and few people initially questioned Arsenal's plan to visit Vietnam. After all, Arsenal has an established academy with one of Vietnam's biggest clubs HAGL ('HAGL-Arsenal Academy') and are keen to market the club in the Far East. However their links to HAGL look set to severely embarrass the club. In their quest for commercial gold, Arsenal have established commercial tie-ins with a company that is labelled by environmental pressure groups as one of the most evil on the planet.
Pressure group, Global Witness highlighted the destruction and misery caused by HAGL in this short and powerful video 'Rubber Barons'. It is recommended viewing.
The HAGL (Hoang Anh Gia Lai) company is owned by football enthusiast Doan Nguyen Duc. In 2002 he invested heavily to create the HAGL football club (who enjoy the rather obvious nickname of "Wood"). The club are one of the most ambitious in South-East Asia and are used by Duc to present an acceptable PR face for the logging company's ruthless deforestation. For more information on the club, click here.
Wenger and Duc - for more images of the Arsenal/HAGL link cick here
In 2007 Arsenal announced that HAGL would become one of their three global Partner Clubs (along with Colorado Rapids and BEC Tero from Thailand). Arsenal's website proudly announced the establishment of a 'technical and marketing partnership' with HAGL. Displaying a stunning lack of foresight and due-diligence, Arsenal announced; 'we are delighted to have found a partner who shares the same goals as us'. The club went on to explain, 'Arsenal will also use the partnership as an opportunity to further develop club-related marketing and merchandising initiatives along with community outreach soccer school activities in Vietnam.'
Having agreed a deal with HAGL to market the cub in Vietnam, Arsenal recently worked with HAGL to arrange a July 2013 friendly in Vietnam. The announcement of the friendly was heavily HAGL branded and Duc can be seen on right in this Press Release picture from the club website.
It is interesting to wonder why the club ever set up the deal in first place. Did the club not check who they were dealing with or did they simply not care? Football’s marketing departments have become increasingly powerful as owners push to derive the maximum impact from club. The information about HAGL has been in the public domain so there are some real questions to be asked of the club’s directors. It is to be hoped that when the club eventually realise the damage such deals do to the ‘brand’ and end their shameful link with HAGL, it will take steps to actively support the work of groups such as Global Witness.
An interesting and somewhat bizarre parallel can be drawn with the situation at HSBC and Bill Oddie (yes, that Bill Oddie). Global Witness and Oddie have been running a campaign to highlight the financing of ruthless logging companies in Malaysia. Faced with an on-line petition, media pressure and Oddie’s presence at the shareholders’ AGM, HSBC announced a seemingly genuine review of their links to deforestation companies.
So, if fans think they see Bill Oddie at Arsenal’s AGM in October, they should rest assured - one of the Goodies really has arrived.
Jean-Louis Dupont, the lawyer who was successfully challenged football contract laws for Jean-Marc Bosman in 1995, has now challenged the Financial Fair Play rules with the European Commission. Football Clubs themselves are restricted from easily challenging the FFP rules (other than through the Court of Arbitration for Sport – CAS) because the rules were voted-in by the European Club Association. Hence Dupont is pressing the challenge on behalf of a Belgian football agent, Daniel Striani. There are several strands to the argument but notably, Dupont argues that FFP would reduce revenue for agents such as Striani.
I have attached the un-edited Press Release at the foot of this article.
Dupont is unlikely to have an easy ride given that in March 2012 the EU Competition Commissioner formally backed FFP, saying the rules were “essential for clubs to have a solid financial foundation.” The next steps are outlined by Sports Lawyer Daniel Geey in this article. Geey believes that the challenge process could take a number of years to conclude.
UEFA responded to the news of challenge; "The rules encourage clubs to 'live within their own means,' which is a sound economic principle aiming to guarantee the long term sustainability and viability of European football,. Uefa believes that financial fair play is fully in line with EU law and is confident that the European commission will reject this complaint."
The area of the FFP rules that UEFA could struggle to defend is the restriction on wealthy owners injecting cash into the club to fund spending (e.g. as in Man City, Chelsea or potentially PSG). It might be hard to argue that sustainability is adversely impacted when the club’s debt doesn't grow despite big annual losses (Man City’s owner for example, regularly injects funds to cover any losses and the club is effectively debt-free).
The first punishments for overspending are due to be announced from December this year onwards. Technically, the CFCB decision-making panel is independent from UEFA and should not consider this challenge when determining the punishments for the clubs. However, if Dupont ultimately wins the challenge and FFP is deemed to be unlawful, UEFA would be liable for any historic damages that the sanctions had caused . The compensation could run into hundreds of millions of euros. There is therefore a distinct possibility that the punishments handed-out during the first Monitoring Period may now be less harsh than would otherwise be the case. This challenge will be extremely welcome news to Paris-Saint Germain and Manchester City.
Dupont's Press Release:
Today, 6 May 2013, Mr Daniel Striani, player agent (registered with the Belgian Football Association), represented by lawyer Jean-Louis Dupont, lodged a complaint with the European Commission against UEFA in order to challenge infringements to fundamental principles of EU law caused by some provisions of the UEFA “Financial Fair Play” regulation (FFP).
Specifically, this complaint challenges the restrictions of competition caused by the “Break-even rule” (article 57 of the UEFA FFP regulation).
The rule imposes on clubs that participate in the UEFA Champions League or in the Europa League the obligation “not to overspend” (the expenses of a club cannot exceed income). In effect, a club owner is prohibited from “overspending” even if such overspending aims at growing the club.
The “Break-even” rule (which, according to article 101 of the Treaty on the functioning of the EU, is an “agreement between undertakings”) generates the following restrictions of competition:
- Restriction of investments;
- Fossilization of the existing market structure (i.e. the current top clubs are likely to maintain their leadership, and even to increase it);
- Reduction of the number of transfers, of the transfer amounts and of the number of players under contracts per club;
- Deflatory effect on the level of players’ salaries; and
- Consequently, a deflatory effect on the revenues of players’ agents (depending on the level of transfer amounts and/or of players salaries).
At the same time, because of the aforementioned restraints, the “Break-even” rule also infringes other EU fundamental freedoms: free movement of capital (as far as club owners are concerned), free movement of workers (players) and free movement of services (player agents). Consequently, such restriction of competition and violation of EU fundamental freedoms cannot be justified by the objectives put forward by UEFA (long term financial stability of club football; and integrity of the UEFA interclub competitions).
Moreover, detailed legal and economic analysis shows that, even if the “Break-even” rule may appear initially a plausible concept, the rule is not able to achieve efficiently its objectives as presented by UEFA (whereas other means are available to attain such objectives. For additional information, see The Wall Street Journal op-ed published 25 March 2013 - http://online.wsj.com/article/SB10001424127887324077704578357992271428024.html
As far as the integrity of the UEFA competition is concerned, in order to avoid the risk that club X would jeopardize the smooth running of the competition because its owner stops mid season providing funds (the “overspending”), it is not necessary to prohibit such “overspending” (as implemented by the “Break-even rule”), when it is sufficient to require “overspending” to be fully guaranteed (for instance, by means of bank guarantees) before the start of the competition and for its whole duration.
In short, the current prohibition – even assuming it to be justifiable (quod non) in the light of the pursued objective (i.e. integrity) – is in practice illegal because the rule is not proportionate (since it can be replaced by another measure, equally efficient but less damaging as far as EU freedoms are concerned).
In conformity with article 101.2 of the Treaties of the European Union, the complainant requests the European Commission to declare that the Break-even rule is null.
It is important to note this complaint does not at all question the legality of the UEFA rule (also included in the FFP regulation) that states that any club participating in the UEFA competition must prove – before the start of the competition – that it has no overdue payables towards clubs, players and social/tax authorities. In our view, this rule is justified in principle for the attainment of the integrity of the football competition and proportionate to this objective).
A copy of the complaint has been provided to UEFA.
Note to editors: The Financial Fair Play (FFP) rules were first proposed by UEFA in 2009 and come fully into force in the 2013-14 football season. Clubs that do not comply with this "break-even" principle will face sanctions, including a potential ban on participation in UEFA competitions.
Italian site http://tifosobilanciato.it has published an unusually candid interview with Umberto Gandini, AC Milan Organising Director and Vice President of the European Club Association.
The European Club Association (ECA) is the representative association for Europe’s top clubs and is headed by Karl-Heinz Rummenigge, with Gandini as Vice President. The ECA works with UEFA whenever rule-changes are being proposed and also petitions UEFA for change. The Financial Fair Play rules were produced in consultation with ECA and were voted-in by the ECA members.
In the interview with Diego Tari, Gandini explained that the FFP rules stemmed directly from the 2008 Champions League final between Manchester United and Chelsea (two clubs that had exceptionally high debt levels). This is a distinctly 'off-message' admission by Gandini - English journalists have often suggested that the FFP rules were introduced specifically to prevent further English club success. Platini has been questioned on this repeatedly and has always maintained that the rules were introduced solely to tackle debt and were not anti-English. In an interview with the Telegraph last year, for example, Platini advised “The message I want to send is that this is not an English problem. This is not a question of wanting to kill the clubs in England or anywhere else, it is to help the clubs.”
Gandini's statement opens up this debate once again and somewhat undermines UEFA’s FFP positioning as a measure aimed purely at preventing Pan-European sustainability issues. It will not have escaped attention that Chelsea and City reined-in their spending to comply with FFP rules and had miserable Champions League campaigns (in a competition dominated by two Bundesliga clubs).
Gandini’s comments on Paris-Saint Germain are also of interest. Commenting on their attempts to justify their huge-backdated sponsorship from the Qatar Tourist Authority (a body connected to the club owner), Gandani explained “ To be honest … none of us envy PSG at the moment! To prove that a sponsorship of 150 euros million is for ‘fair value’ is complex and, as far as I'm concerned, difficult. “
Given Zenit and Anzhi continued high-spending, it is also interesting that Gandini questions the absence of account-auditing carried for clubs from the Russian Federation; “we have a part of the UEFA world that has stringent procedures and request a third party (audit firm) control, while another part of the same world can potentially draw up budgets and provide them to CFCB [UEFA’s financial control body] without these being subject to any external check.”
Gandini also raises the issue of membership subscriptions paid to top Spanish clubs. Perhaps worryingly for Barcelon and Real Madrid, the ECA Vice President wondered “Why, for example, can the 180,000 Barcelona shareholders annually fund their Club and Abramovich (to say a random name) cannot?”
Diego Tari’s Italian site http://tifosobilanciato.it - Twitter: @Tifbilanciato
Now that QPR have finally been relegated, it seems an appropriate time to outline the financial implications for the club (and other clubs in the Championship).
Perhaps the best place start is with a projection of the financial position for the club up to the end of next season (i.e. the end of their first season in the Championship):
I should point out that this carries a much heavier ‘health-warning’ than most of my projections – we simply don’t know how successful the club will be in getting players to leave in the Summer and we don’t have a full picture of the impact of any relegation clauses the club may have in place to reduce wages. However it does provide a useful yardstick for comparison.
Although we are going to have to wait nearly 12 months to see the impact of this season’s foolhardy spending. The projection suggests QPR will have lost around £68.4m during the current season. It appears that the wage spend is now well over £80m and the amortisation (i.e. the impact of transfer fee expenditure) has doubled. The Exceptional items represent the cost of sacking Warnock (2010/11) and Hughes (2011/12).
The last annual accounts (2011/12) records the net debt at £88.9m. The club recently took out a further loan of £15m for development of a Training Ground. Factoring in the above projection, net debt at the club at the end of the current season is likely to be around £168m.
With this level of debt, fans are likely to be concerned that the club could represent another ‘Portsmouth’. However, due to the club’s ownership profile, QPR are highly unlikely to suffer the same fate. QPR are 66% owned by Fernandes, Meranun and Gnanalingham and 33% owned by the Mittal family. The Mittal family are by all accounts extraordinarily wealthy (worth $10.4bn according to Forbes). Gnanalingham also has significant family money. Fernandes and Meranum will more impacted by the ongoing losses at QPR (via loans from their Tune Group). Both made their money with AirAsia and have large share-holdings in the company (valued at around £220m each). However, it is the ongoing support of the Mittal family that is the key to QPR’s stability – both the Mittal family and Tune Group provided further loans to the club in 2011/12. It seems extraordinarily unlikely that the Mittal family would be willing to let QPR get into financial difficulty.
It is interesting to note that if QPR had escaped relegation, they would not have been able to meet UEFA’s FFP Break-Even criteria (losing £91m over the two seasons of the first Monitoring Period vs the £38m maximum permitted loss). As a Championship Club, QPR do not have to apply for a UEFA licence next season unless they are fortunate enough to win a UEFA place via the League Cup or the FA Cup. However the figures suggest that the club would not be granted a licence in this scenario – QPR fans might think twice about supporting their team in the domestic cups next season, knowing that it is not possible to gain a UEFA slot even if they win the competition. In any event the UEFA rules would require the owners to put their hand in their pocket and convert around £80m+ of debt into equity – the fact that the club recently took out a £15m loan suggests the owners are not looking to reduce club debts in this way.
Looking into next year, QPR will benefit from a £23m parachute payment. However, this does not make up for the lost TV income (see TV Revenue row for the impact). It seems likely that the club will be able to manage some players out of the club and it will probably have some wage-reduction clauses in the existing contracts (although reports suggest that most high-earners don’t have these contract clauses). The heavily caveated projection suggests the club could report a loss of around £61.5m during their first season in the Championship. This figure is well above the new FFP rules for the Championship and will have significant implications for the club.
From next season, strict new FFP rules for the Championship have been introduced (with penalties). All clubs (including QPR) will need to keep future club losses below £8m for the coming season. Any overspend will become apparent when the accounts for the 2013/14 season are submitted in December 2014. An overspending club will be given a transfer ban (with the first ban coming into effect in January 2015). Once this is understood, the need for QPR to ‘bounce back’ and win promotion at the very first attempt becomes apparent. If they don’t bounce-back immediately, QPR will almost certainly not be able to sign any new players after end August 2014. This would severely hamper their campaign during their second season in the Championship.
Given that only one club out of the last 9 have bounced back at the first attempt, QPR’s challenge should not be underestimated. The matter becomes even more pressing when you consider that the Transfer Ban would not be lifted until the club can prove that it was on track to bring losses below £6m in the next season (£5m from 2016) – conceivably QPR could have Transfer Ban in place for several seasons.
If QPR were fortunate enough to win promotion at the first attempt, they would be affected by the new ‘Fair Play Tax’. Any club that wins promotion as a result of overspending will have to pay ‘tax’ based on a sliding scale. Assuming QPR lose £61.5m next season, the club would end up paying a tax of £48.7m – a huge amount (see here for details of the rules and the calculation). This tax would then be divided up and allocated to those clubs in the Championship that have complied with the FFP rules (adding an extra incentive for overspending clubs such as Leicester to comply). Interestingly, as any unused parachute payments are also divided up amongst clubs, some Championship outfits may ultimately be happy to see QPR bounce back as the scenario would benefit them by a further £2m.
Given the need for QPR to win promotion at their first attempt, it will be interesting to see if the new FFP rules actually encourage QPR to continue their overspending. The club will have to weigh up the potential benefits of a place in the Premier League, against the Transfer Tax and the risk of becoming a 'zombie club' with an almost indefinite Transfer Ban should they fail to quickly return to the top flight.
Sunderland's contentious sponsorship deal with 'Invest In Africa' has hit problems. Amid some confusion, the club's lucrative deal has been cancelled, with the club suggesting the split is 'by mutual consent'.
Back in July 2012 I wrote an article about Sunderland's new sponsor 'Invest in Africa' - a 'non-profit organisation' backed by Tullow Oil. At the time, many people were surprised by the size of the sponsorship deal which reported as being 'worth £20m a season'. This was a significant increase in the club's previous deal with the Tombola Bingo/gambling company which was worth around £1m to the club.
When the original deal was struck, environmental campaigners alleged that 'Invest In Africa' was a 'PR front' for Tullow Oil, a company accused of striking shady deals with Ugandan government officials and of depriving locals of their fishing grounds.
Tullow are now mired in a potentially hugely-damaging court case in Uganda and are accused of bribing officials in return for oil-exploitation rights. The magazine Foreign Policy recently accused the company of having a “a complete absence of corporate social responsibility". Shortly after the issue blew-up, David Milliband resigned from his post on the board at Sunderland, citing De Canio's admiration of fascism as the reason. Since then, the campaigning website Platform has published a piece suggesting that the Tullow court case was the greater driver for Milliband. This triggered a extremely interesting piece of investigative journalism from the BBC who produced this short news report on the Tullow issues as they affected Sunderland (I would recommend you watch it).
Upon launching Invest In Africa,Tullow announced that they planned to bring five other major partners to the Invest In Africa initiative and that it would not succeed if they did not acquire other collaborators. Tullow spokesman Cazenove advised that "there will be other partners, significant companies, household names from various sectors, and soon". Nine months on, and with just one additional partner, Invest In Africa doesn't appear to have worked as intended - it seems likely that it is Tullow rather than Sunderland who have pulled the plug on the shirt sponsorship deal.
When the deal was cancelled, the club announced that the contract had always had a one-year review/break agreement. However reports suggest that Tullow were considering pulling the deal even before the De Canio appointment. Would Sunderland really cancel a £20m a year deal when it had recently announced a £26m operating loss? It is interesting to note that the club don't yet have another sponsorship deal in place - they announced that there is a deal in the pipeline but it would be dependent on the division the club is in next season. Cancelling a highly lucrative deal, when there is no guaranteed replacement, does seem rather unusual. I should point out that there are suspicions that the headline '£20m' sponsorship is probably not quite as it first appeared and that, although sizeable, it may have brought in somewhat less than the quoted figure (i.e. it was linked to Premier League/Cup success and UEFA qualification).
To add to the rather unclear picture, Sunderland recently entered into an association with the Nelson Mandela Foundation and have committed to raise funds for the organisation as part of the club strategy for growing their 'brand' in Africa. Sunderland hope to seal a new sponsorship deal with an African company (although it would be fortunate to sign a replacement contract as lucrative as the Tullow/Invest In Africa deal).
Just as managers never truly leave a club 'by mutual consent', there is likely to have been one party driving the divorce. This leaves us with some unanswered questions; did Sunderland take a highly principled decision and end a lucrative contract, following allegations against Tullow; or did Tullow end the deal following lack of interest in the initiative from other partners? Although it appears that Tullow ended the deal, if it transpires that Sunderland did take the lead and act out of principle they should be applauded. However, without more information from the club it is hard for fans to know whether to cheer or jeer.
On the face of it, things don't get much better for Galatasary fans. They have a team of top stars, are through to the last 8 of the Champions League and have now been drawn against Real Madrid - life is certainly sweet for the Turkish champions. However, the club has spent heavily and recent announcements from the club confirm the club has some serious, immediate problems.
Club President Aysal recently revealed that the club is teetering on the edge of bankruptcy with total debt of $328m. Worryingly, the club has $78m of short-term debt. Aysal explained that the club is financially exposed and that if anyone made a petition to wind up the club, it might prove successful. In a recent interview, he also advised that he would not have taken the job as President if he had known how bad things really were!
Galatasaray have spent heavily on an all-out assault on the Champions League - they are aiming to break into the top-tier of European football on a permanent basis. Just inside the top 30 in the Delloitte Money League, there is a belief that if the club can become a fixture in the top footballing tier of Europe, the commercial revenue will follow. The club have been paying high wages in pursuit of on-field success - January transfer window signings included Drogba (E4m a year and the club picking up his tax-bill) and Sneider (a deal that will cost the club around £22m in fees and wages over the three year deal). The players join established stars such as Eboue and Elmander.
Galatasaray don't operate on a 'benefactor model' like Man City or Chelsea but are part of Public Limited Company with shareholders. When it needs an injection of cash, the company needs to create more shares. In 2011 the company created new shares, raising around $50m. This was a highly controversial move, not least because it diluted the value of the investments of the existing shareholders (the chairman of the financial regulators, the Capital Markets Board, who allowed the share issue, was subsequently sacked).
After further heavy spending, the club now needs more capital. The club recently announced that it intended to raise $96m via a new share issue – the purchasers would be Russian bank VTB. Worryingly for the club, the proposed share issue has been blocked by Turkish regulators. The Capital Markets Board has ruled that making a further share issues would have a serious impact on existing shareholders and cannot be supported. An action by 16 private investors has also been launched aimed at permanently preventing the share issue. To make things worse for the club, in February the Capital Markets Board fined Galatasaray £250k for misleading the regulator and the public over player contracts in 2010. The regulator looks to be standing firm - currently the share issue is going nowhere. Politics and football are closely linked in Turkey and there remains the possibility that the club President may have somewhat overstated the threat of bankruptcy to help drive through the contentious share issue.
Club President Aysal announced that in addition to clearing part of the debt, some of the funds from the proposed share issue are required to meet FFP requirements. Under FFP rules, any new losses need to be covered by injections of equity from the club owners. For Galatasaray, the owners are the shareholders. Although we don’t yet know the size of the club losses over the 2011/12 and 2012/13 season, the President’s announcement suggests that a significant injection of cash is needed by the end of 2013 just to meet FFP requirements. Without the injection of equity from shareholders to cover the losses over the first Monitoring Period (2011/12 and 2012/ 13 ), Galatasary would fail the FFP test.
There are three main financial reasons that a club might fail the FFP test:
1. Overdue payables (i.e. falling behind on tax/social security and transfer fee commitments)
2. Failure to inject equity to cover losses (i.e. club debts increasing)
3. Overspending (i.e. failing to Break Even)
UEFA’s CFCB panel has already handed out UEFA bans to several clubs (including two in Turkey) for having ‘overdue payables’ and clearly takes this failure very seriously. However, given that the FFP rules were introduced specifically to tackle the issue of growing club-debts, it seems likely that this offence might be viewed as the most serious of all the three offences. Galatasaray will find themselves in a very difficult position indeed if it cannot raise the funds to inject the required equity. Although Aysal likes to point out that “Sustainable success creates income”, it remains to be seen just how sustainable Galatasaray’s success will be.
**Update 24 March**
This article generated lots of interest and is worth a post-script. Following concern about the interview where the threat of ‘bankruptcy’ was raised, the Galatasaray president has since stated that he was misunderstood. In a club statement he explained that he had really meant to articulate that the club had had historic problems which it was now on the way to overcoming. Whether this explanation is credible might depend on which side of the polarised Galatasaray/Fenerbahce divide you sit. As I have pointed out, there is a suspicion that the President may have overplayed the immediate financial worries to drive through the share issue.
So, where does Galatasaray’s money come from and are they really in trouble?
I am grateful to Luca Marotta from http://luckmar.blogspot.co.uk/ for providing the latest Galatasaray accounts. My turkish and online translation tools are not good enough to enable me to dive into the detail of this (though I am sure Turkish fans will enjoy analysing the accounts). However there are a few things that jump out.
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Galatasaray lost €15m in the year ending May 2012 and since then the club have spent heavily. However, the Champions League success will bring in something around €27m this season. With the addition to the extra games and commercial revenue, all things being equal, it is possible that the club might report a modest profit this campaign (though analysis of the accounts would be required to really understand the position). The other thing to point out is the negative equity in the club. The spending looks to be fuelled by debt and the shareholders equity is a huge negative figure (-€107m). There is clearly a need for cash injection into the club and from 2012/13 the permitted loss under FFP rules average just €10m a season. Clearly Galatasaray have club set-up that would easily exceed €10m loss without a Champions League campaign.
So, Galatasaray’s model might just work long-term provided they continue to enjoy Champions League success every season and also get a much-needed injection of capital into the club. It seems a rather precarious existence and we should be mindful of Leeds, who had a spectacular financial collapse when they failed to qualify for the Champions League. Only the Turkish champions are guaranteed a place in the lucrative group stages and the club should be mindful that that they failed to qualify as recently as 2011.
With Malaga and Paris St-Germain in the last 8 of the Champions League, questions have been raised about the impact of potential FFP punishments on the Qatar owned clubs’ campaigns. Both are very much the ‘bad boys’ of FFP and it is interesting to explore what might happen to the clubs if either win the current UEFA Champions League campaign.
Paris St-Germain look likely to fall-foul of the rule relating to the Break Even requirement which requires clubs to balance their incomings and outgoings. The club have been overspending and look set to fail the initial test by around £200m. Although the club will technically come close to breaking-even over the first Monitoring Period (covering seasons 2011/12 and 2012/13) it will only be achieved through the huge inflated deal with the Qatar Tourist Authority. For reasons that I explored here and here, it is very likely that, the QTA deal will be deemed to be what it is: an artificial deal aimed at injecting cash into the club as a way to get round the FFP Break Even rules.
For PSG, The key punishment to consider is UEFA's ‘sanction 9’ which is “the withdrawal of a title or award”. This punishment was added to the rule-book during 2012 – it isn’t just a hangover from earlier rule-shaping but is something deliberately and specifically introduced by UEFA fairly recently. Crucially this suggests that UEFA can now envisage a scenario when the punishment will be of use.
So, how could this affect PSG?
The decision on FFP compliance takes place according to the following timetable produced by UEFA.
UEFA's slide It isn’t particularly easy to read but we can see that the final decision on club licensing for the First Monitoring Period takes place between December and April (the pink box).
By December this year, it is possible that PSG will be the reigning European champions. Given that they are set to fail the Break Even test, UEFA’s independent panel (CFCB) are obliged to give PSG one or more of the available 9 punishments (see foot of this article for the punishments). Such is the scale of the overspend that it is quite possible that they would receive a ban from competing in the 2014/15 Champions League. It is also entirely possible that the panel will also invoke sanction 9 ‘withdrawal of title or award’. PSG could well be viewed as having carried out their successful Champions League campaign with a wage spend brazenly in breach of the rules. In simple terms, ‘financial doping’ – and as we all know drug cheats can expect to be stripped of their medals and banned from future competitions. For PSG, FFP could be rather like having a drugs test shortly winning their medal. In this scenario, David Beckham would be asked to send his medal back to UEFA.
Should PSG fail the Break Even test when it is carried out in December 2013, UEFA will also have to look at the other available punishments. They can withhold prize money but interestingly could also throw a club out the Champions League – the sanction of ‘disqualification from competition in progress’. So irrespective of whether they win the Champions League in May, PSG could find themselves thrown out of next year’s competition half-way through the campaign (i.e. the 2013/14 campaign). That would create a real shock, but if UEFA want to ‘throw the book’ at PSG, they have the available punishments to do so.
Clearly this would be the worst-case scenario for PSG - and there is a considerable element of speculation here on how the rules may or not be applied. However,the fact that the rules are in place and that UEFA General Secretary Infantino recently used the 'cheat' word to describe PSG's approach, should at least give them cause for concern. The CFCB panel that determine the punishments are independent from UEFA and have shown that they are not afraid to punish and exclude clubs.
The Malaga position is also interesting. In December the CFCB panel banned Malaga from next year’s UEFA competitions due to ‘overdue payables’ (i.e. funds owned to other clubs, or overdue tax). Malaga were also threatened with another year’s exclusion and need to report back to CFCB in March (the results should be out fairly soon). However, crucially for the club, Malaga were not thrown-out of from current Champions League campaign. This suggests that they will not have any further sanction should they actually win the competition (they will probably pass the Break Even test). If they were to win the competition in May, Malaga would not be able to defend their title. This would be an interesting ‘first’ for UEFA.
Liverpool recently reported a £40.5m loss the 2011/12 season (the first year of the initial FFP Monitoring Period). I have attached a table summarising the accounts, together with a projection for the next accounting period.
Not being a Liverpool supporter, I am grateful for the assistance of Mike Donald (@mdonald1987) for his help in pulling the above together and providing information on events at the club.
The good news for Liverpool fans is that the club appears to have turned a corner. Based on information announced by the club it looks like Liverpool's next published accounts (relating to the current season) will be a significant improvement on their £40.5m loss reported for the 2011/12 season. They look on course to lose around £15m for the 2012/13 season and are moving towards Break Even and potentially profit once the new TV deal kicks-in during the 2013/14 season.
The newly published accounts for 2011/12 are a little difficult to compare to previous results because Liverpool have changed their account cut-off dates as a consequence of changing their annual accounting period from end July to end May. Consequently, the recently released accounts cover 10 months rather than the usual 12. I should point out that the loss of £40.5m was very much in line with expectations. In May and Sept last year I produced a projection forecasting a£48m loss for the full 12 months –the shortened accounting period essentially explains the difference.
Interestingly, the change in the cut-off dates actually helps the club's financial results by around £10m net. The main difference relates to the fact that only 10 months of wage costs are now included (plus around £3m of other expenses). This reduces the expenses by around £23m. However this is partially offset by a reduction in Commercial Income to reflect the shorter reporting period which reduces income by around £13m. The other costs and revenues are shown on a full-year basis – hence the net benefit of around £10m.
This is particularly interesting because the FFP rules don’t specifically mention any restriction or requirement for the annual reporting period to cover a full 12 months. This looks like it might have been simple oversight by UEFA but means that Liverpool appear to be the first club to have successfully found and used a loophole to help club. Although Liverpool would have passed FFP without this change, it does help reduce the amount of equity that the club owners will need to inject into the club. I should point out that the accounting change was made with some justification and probably wasn’t simply a ruse by the owners. Now that clubs rely proportionately less on Season Ticket revenue and more on pre-season tours, it makes sense for the accounting cut-off to be at the end of May rather than July.
The Liverpool owners converted £47m of club debt to an interest-free loans last August. This is obviously a step forward but is a far-cry from the UEFA (and the Premier League’s new rules) that requires to convert losses to equity. The concept of converting debt to equity is not always well understood – essentially it works as follows: The club creates new shares which are then purchased by the owners. Consequently, the club gain an injection of cash which is used to ensure the debts do not grow further. All the owners gain is a piece of paper (share certificate) - the owners owned 100% of club shares prior to the change and still own 100% of club shares. By converting debt to equity in this way, the owner faces the very real prospect of losing their money entirely – crucially they also have to have the available liquid cash available to inject into the club. The owners will only get their money back if the sell the club (and then it depends on the sale price) or if the club make a profit in future and the club pay the owners a dividend. Understandably, converting debt to equity is not something owners want to do if they can help it. However Liverpool’s owners are going to have to put their hands in their pocket and do this to ensure they can apply for a UEFA licence. Clubs apply for a license in advance so we can be sure Liverpool will apply – however this requirement will mean Liverpool’s owners will have to put their hands in their pockets for around £26m to cover the two years of the first Monitoring Period (see table below).
The FFP rules allow certain types of expenditure to be excluded from the Break Even calculation. The exempted figures include spend on youth development and community spend. However club accounts currently don’t break down this spend and analysts have had to make guesses about how much this might be. Recently Man City intimated that it spent £10m on youth development and community spend in one year so £20m is probably a good estimate for Liverpool over the two years of the Monitoring Period. Of course, if the actual figure turns out to be less than £10m a season, the owners will need to inject a higher amount of equity.
The Post Balance Sheet Events (PBE) section of any accounts are always worth a read (often one of the final pages). This section tells us if anything significant that has happened since the cut-off for the accounts, up to the time the accounts were signed-off by the auditors. Here they report on events between 1 June 2012 and 28 November 2012 (i.e. the summer transfer window). Liverpool report that they made a loss on player trading of £8.4m over this period. This is interesting as the club only sold three players of note: Adam, Kuyt and Aquilani. The ‘loss on player trading’ figure relates to the difference to their selling price and their book value (i.e. amortised figure). It is difficult to see where the £8.4m book value loss came from for these players (it looks like the club may well have given Aquilani away on a free transfer). With no sales in January, this looks like the figure that will appear in the next year’s accounts (compared to a £1.7m loss on player trading in the newly published results, and a profit of over £40m the previous year).
Although the club debt has grown from £65m to £87m, for the purposes of passing the FFP Break-Even test, debt is largely irrelevant. The Break-Even test just looks at whether the club has balanced incomings and outgoings. Having large debt will affect a club’s interest payments (and therefore have some bearing on the ability to Break Even) – however debt in itself is not a component of the UEFA test. I should point out that Liverpool will now have no problem passing the FFP test in the First Monitoring Period as shown in this table.
The important thing to remember for Liverpool is that the Warrior deal commenced in 2012/13 and will be in the next accounts – this will considerably help raise their commercial income. In future years, Liverpool, like all clubs will also benefit from the new TV deal (from 2013/14 for three years) which will raise income by around £20m-£30m. However, this new income would be partially offset by a loss of around £5m should the club fail to qualify for the Europa League. Overall, the club finances are beginning to look much healthier. In the long-term however, as the club directors continue to point out in the accounts, on-field performance is the key driver of off-field financial success.
If UEFA wanted to find one club to illustrate the concept of ‘financial doping’ it would probably point to Paris St-Germain.
Although the club hasn’t posted formal accounts for two years* they have had to provide figures to the DNCG [the organisation that oversees club accounting on behalf of the Ligue de Football Professionel (LFP)]. DNCG publishes the account information and I have attached the relevant page for PSG for the year ending June 2012 (with my highlights and translation of the key items):
Although the club made a loss of €5.5m, the item to look at is the red highlighted item ‘Other’ for €125m. Without this mysterious item, the club would have made a staggering loss of €130m in the first season of the FFP Monitoring Period. So, what was this €125m?
In January 2013, PSG announced that it had signed a huge deal with the Qatar Tourist Authority (QTA). The precise amount of the deal was a little vague but it appears the revenue may be around €200m a year. When the deal was announced the club advised that it would be backdated – at the time many believed this meant to the beginning of the 2012/13 season. However Le Parisien reported that the deal would actually be backdated to the previous season. Now that we see figures, it is apparent that this is exactly what the club has done – a deal agreed in January 2013 for promoting the Qatar Tourist Authority has been backdated to the year before the deal actually existed!
It is interesting to note that for all that money, the QTA don’t even get their names on the club shirts (that honour goes to Emirates airline). All QTA receive for their money is the rather nebulous benefit of association with the club (plus promotion within the ground). Even if the stories about renaming the 'Parc de princes' as 'Parc de Qatar' ultimately turn out to true, it’s hardly a decent return for the €325m that they have already paid to the club.
Fortunately, this outrageous deal will be assessed by UEFA’s CFCB panel. It is very likely that QTA would be considered to be ‘related’ to the PSG owners (both have the same beneficial owners - the Qatari government). Under UEFA FFP rules, all ‘related party transactions’ will have to be assessed by the CFCB and a ‘fair value’ assigned to the deal. Determining a ‘fair-value’ won’t be easy but the panel will look at precedents such as the Azerbaijan Tourist Board’s €20m a year shirt sponsorship of Atletico Madrid. The CFCB panel are actually independent from UEFA and, as we saw with their decision to ban Malaga from the UEFA competition for having ‘overdue payables’, they are prepared to take tough decisions. The writing appears to be on the wall for PSG - in January UEFA General Secretary Infantino warned PSG that they could not ‘cheat’ the rules.
For me, all the indications point to PSG being banned from UEFA competitions from 2014/15 as a result of failing the FFP Break Even test. However, the position is actually potentially more serious (and interesting) for PSG.
During 2012, UEFA decided to introduce a new punishment for clubs that fail to meet the FFP criteria. Without any great fanfare, UEFA introduced a sanction enabling them to strip a club of their UEFA title if they ultimately fail the FFP test. Perhaps the punishment was added as a deterrent, but it seems more likely that UEFA would use it strip Paris St-Germain (or Malaga) of their title if they were to win the Champions League. There is also every chance that prize money may also be withheld (another of UEFA's available sanctions).
We therefore need to ponder the interesting scenario whereby David Beckham end ups winning the Champions League with PSG, only to be asked to return his medal six months later!
*French law allows a company to pay a fine (between €1500 and €3000) if it doesn’t wish to log accounts with France’s Companies House (Greffe). Companies often prefer to pay the fine.
For an analysis of Paris St-Germain’s finances (and those of other clubs), visit Luca Marotta's excellent Italian site http://luckmar.blogspot.
Premier League clubs are resorting to increasingly devious actions to bury bad financial bad news. Comparatively few fans are skilled at analysing club accounts so rely on journalists to interpret their team's financial results for them. However, clubs realise that if there is bad news to presented in the accounts, they can avoid the unwelcome glare of media and fan attention by timing their release so the news is not fully reported.
Recently Aston Villa released their annual accounts (another set of shockingly bad figures) at 4.30 on a Friday afternoon. The club chose this time deliberately – it knew that many journalists had pretty-much packed up work for the day (and in any event the next-days paper lay-outs had already been produced). David Conn of the Guardian was at his desk until after 6.30pm on the Friday writing up the review of the accounts. However, for practical reasons most other the newspapers didn’t manage to report Villa’s figures. The ploy worked - newspapers reported on the weekend football action on the Sunday and by the following week it was ‘old news’ and they had escaped media scrutiny. Somewhere at Villa Towers, a Media Relations Manager is receiving a pat on the back for the way they handled the release.
Other clubs have done something similar. Man City also released their figures (another poor set of results) on a Friday afternoon. However City’s approach was, if anything, even more cynical. As with Villa, journalists were not aware in advance that the figures would be released that day (clubs rarely do). However, on the Friday morning, the club released two stories to the press (one about Dzeko was particularly thin and had some journalists scratching their heads about its relevance). The aim was to get newspapers to fill their lay-outs with City pieces so that when the accounts were released, they would be either ignored completely or else reported as a post script. When the figures were released in the afternoon, they were accompanied with a press briefing – key sections were repeated verbatim and unchallenged. This included a seemingly incorrect/ misleading piece about the wages paid to players signed to players pre-June 2010.
Ultimately City’s plan also worked – the Saturday newspapers carried little in-depth analysis of their figures. One piece of interesting information –the fact that the owners paid £12m to the club for ‘intellectual property and know-how’ slipped under the radar almost entirely.
Chelsea and Fulham’s approach was also particularly interesting. Both clubs made a detail-lacking upbeat Press Release to announce their figures, some weeks in advance of the release of the full figures. Fulham’s approach was probably the more cynical of the two. The club announced that it had made an ‘Operating Profit’ of £1.2m. However when the results were actually filed at Companies' House, it was clear that the club had not made any Operating Profit - the accounts report a £900k Operating Loss.
Frustratingly, the term ‘Operating Profit/Loss’ has no fixed definition. The accounts revealed that Fulham had used an extraordinarily generous definition of Operating Proff/Loss - one that excluded any amortisation of player transfer fees! To Fulham, it seems purchasing and utilising players is not part of their ordinary business.
Fulham's accounts - extract of P&L:
Clearly all top-flight clubs routinely purchase players from other clubs so Fulham’s definition was disingenuous at best.
The figures were actually considerably worse than the club portrayed them be. After expenses, it transpired that Fulham’s triumphant ‘Operating Profit’ was actually a loss for the season of £18.8m! However you won’t find any discussion of this figure in any newspaper – by the time the news filtered out, Fulham’s results were considered old news and went unreported.
Chelsea made a similar detail-lacking press release. Much to everyone’s surprise they declared that they had made a £1.4m profit over the 2011/12 season. This claim was reported unchallenged by most papers. To his credit Steve Tongue in the Independent on Sunday ran a piece questioning how the club had managed to achieve a seemingly impossible profit; ‘Winds of change blowing for Chelsea but do the accounts add up?’ When the accounts were filed in January we found that around £18.5m was cancellation of some preference shares. The share transaction has yet to be explained by the club and it is not clear if this can be counted as ‘relevant income’ for the purpose of FFP or if the timing has been artificially manipulated to help them pass the FFP test.
Clubs are technically free to release their figures whenever and however they like (as long as the accounts are filed at Companies House on time). Some clubs, like Liverpool, understand that they have a moral duty and relationship with their fans – Liverpool released their uncomfortably poor results on a Monday morning. Other clubs like Chelsea, City, Fulham and Villa will take a little longer to realise the world has moved and the zeitgeist is with’sustainability’ rather than insularity and evasion.
Recently, the www.sportingintelligence.com website produced a Premier League table drawn to a scale where every point was given the same vertical scale. This type of graph is know as a Cann Table and a website dedicated to them can be found here. The website www.experimental361.com also produced some very attractive charts showing the tables in this visual format.
The spending constraints recently voted in by Premier League clubs are essentially designed prevent club debts by tackling escalating wage costs. Against this background it is interesting to combine the Cann Table with a scaled table of wage costs. The result is the attached chart:
The right two columns represent the current league table drawn to scale. The wage costs (shown in the two left columns) are based on either, recently published wage costs for the 2011/12 season, or, where not available, an estimate of the wage bill.
The wage costs are highly polarised with Man City spending £200m on wages, whereas clubs like Swansea spend only around £35m. Manchester City's (and Chelsea's) spending generates a stretched table with only a few high wage-paying clubs at the top, but most of the clubs paying broadly similar wages around the lower part of the table.
The green and red lines show the clubs that have significantly over-performed (green line) or under-performed (red line) against their wages expenditure. Looking at the clubs who have most over-performed, we see:
- Man Utd, Tottenham, Swansea, Everton, West Brom, Stoke, Norwich and Southampton
The stretching of the wages table has the effect of somewhat over-emphasising the achievements of the lower teams in the league table - however by any standards, these teams have all had a rather good season.
There are six teams that the table suggests have under-performed given the resources at their disposal:
- Man City, Chelsea, Arsenal, Liverpool, Villa and QPR
Interestingly, these are the teams where the managers have probably been under most pressure this season.
It is not a perfect model by any means but does articulate the concept that performance expectation is driven by the amount of money a club spends on wages - when a club's league performance falls below this level, the sack-race odds shorten. When the team over-performs compared to their wage-bill, they are often the ones where the managers receive the media plaudits (e.g. Moyes, Laudrup, Villas-Boas and even Ferguson).
We can expect City and Chelsea's spending to be reigned-in as FFP and the PL spending constraints bite. We should start to see the wages element of the chart become less stretched. One of the risks of the new rules is that Manchester United might take over Manchester City's role as the high spenders in the division. A high wage budget in the hands of a manager who can consistently get the maximum performance from the expenditure, could result in a Premier League procession.
But as the chart shows, there is a distinct difference between having a high wage bill and having a manager who knows what to do with the funds.
Premier League clubs have voted to introduce spending constraints. I will cover-off the changes over the next few days and look at any anomalies within the rules – however, at the moment much of the information is still to reach the public domain. The Premier League’s communication of the new rules can be round here. For now, it is interesting to look at how the Premier League executives managed to get the rules over the line.
If you look on the Premier League’s website, the one term you will not find to describe the changes is ‘Financial Fair Play’. The Premier League have always been quick to point out that they have long had many of the components of UEFA’s FFP rules – the only part that was missing (until now) has been some kind of spending restriction.
Premier League Chief Executive Richard Scudamore has been keen to introduce some aspect of ‘Break Even’ restrictions since he was given some fairly direct questioning by the Parliamentary Select Committee on Football Governance. He was put on the spot and asked what assurances could he give that the increased TV revenue (due from 2013/14) wouldn’t be wasted again on wages and transfer fees. Scudamore was able to announce that he was about to establish a Working Group focussed on introducing spending constraints. Initially, the noises coming out of the Premier League were very much along the lines that people should not get their hopes up and that many Working Parties are set up without ultimately delivering any change. However, parliament and journalists kept up the pressure and the final Parliamentary report declared a distinct lack of conviction that the Premier League would ultimately deliver change (see sections 81 and 84). The report even threatened government licensing of the Premier League clubs if some FFP-style rules were not introduced – this was something Scudamore was very keen to avoid.
Against this background, and sensing a sea-change in public and political opinion, the politicians of the Premier League swung their energy behind the forces for change. Pressure was put on Premier League owners and Abramovic and Al Fayed were influenced into converting the club debts into equity. Crucially, when it appeared that there was an impasse within the Premier League Chairmen, Scudamore was able to apply pressure, influence and managed to cajole the disparate self-interested clubs into supporting the change. In the end, it was a close-run thing. For the proposal to be passed, two-thirds (66.67%) of votes cast had to support the change. In the end, six clubs voted against and one club abstained meaning 68.4% voted for the change. The clubs that voted against the changes were:
Against: Man City, Fulham, Aston Villa, West Brom, Swansea, Southampton.
Abstained: Reading abstained
In the weeks running up to the vote, Arsenal, Spurs, Man Utd and Liverpool joined together and lobbied the Premier League to push for rules that prevented wealthy owners putting money into clubs. The Mail published a leaked letter from the gang of four explaining their position:
Such a change would have hit clubs that operate on a ‘wealthy benefactor model’ (such as Chelsea, City, Fulham, Villa). City and Chelsea are opposed to any change that would overly restrict the owner being able to put their hand in their pocket and finance the club. Clearly clubs were lobbying out of self-interest and wanted to gain an advantage over their rivals.
Interestingly, West Brom voted in a different way to how we we might have expected. West Brom took highly principled position; they believe that, as they are able to balance their books and not run up debt, no restrictions are required. It appears that Swansea may have taken a similar view.
Whe Reading and Southampton were in the Championship, they both voted against FFP rules being introduced - so perhaps it is no surprise that they took a consistent position and neither voted in favour this time (although Reading abstained).
Chelsea’s position is interesting. They were originally against all spending constraints but have been won round by Premier League influence and the concession that permits clubs to lose up to £105m over three seasons (starting next season in 2013/14). This of course is a long way from ‘Break Even’ and considerably in excess of UEFA's E30m maximum Break Even Deficit figure that is in operation over the three corresponding seasons.
It looks like the new rules will be enough to keep the threat of government licensing at bay and the initial government respons has been favourable.
I will analyse and explain the mechanics, the impact and idiosyncrasies of the rules over the next few days.
I have been supplied with an internal UEFA document that is not currently in the public domain - it provides information on the FFP process and punishments. I am grateful to Diego, on twitter @Tifbilanciato who runs the website http://tifosobilanciato.it for the 'heads-up'. Diego's site carries a large number of english articles and is a library of football news and references - he is well worth following on twitter.
The pdf presentation below was produced by UEFA for the Croatian football federation. Although anyone interested in the workings of FFP and timing of licensing process will find most of it fascinating, the section of the document that will gain the most attention will probably be the slide that presents the punishments for breaching the FFP rules.
Size : 1668.919 Kb
Type : pdf
Last January, UEFA announced their 8 available FFP punishments (see below). However readers will notice that presentation reveals that a new 9th sanction, not previously disclosed, is now available. The punishment is: The withdrawal of title or award
It is interesting to speculate on what motivated UEFA to add this extra punishment ('the withdrawal of a title or award'). It seems likely that UEFA have been influenced by a combination of three events:
1 Chelsea's victory in the Champions League final - the club's spending policy is not generally popular.
2 Atletico's victory in the Europa League - Atletico has their prize money temporarily frozen owing to overdue 'payables (i.e tax or wages)
3 PSG's extravagant spending and progression to the last 16 of the Champions League
Although we don't know in what circumstances the punishment is intended to be applied, it seems likely that a club failing the Break-Even test or having 'overdue payables' faces the prospect of being stripped of a title.
It is not entirely clear but it seems likely that any punishment is likely to depend on whether the transgression happened during the season in which the title was won.
Chelsea seem to have improved their Break Even performance and there is good chance they will now pass the test (although Premier League Chief Executive Richard Scudamore acknowledged that it was likely to be a close-run-thing). Provided they can pass the Break Even test then Chelsea will have nothing to fear. However now that the new punishment is available, even a marginal fail could result in pressure on UEFA to retrospectively strip Chelsea of their title. However I would be surprised if UEFA had an appetite for taking such action in respect of a title won 18 months to two years prior to the Break Even decision. Chelsea's tilt at this year's Europa League title provides an additional interesting aspect to consider the application punishment - the title could quite conceivably by removed if the club fail the Break Even test.
Atletico have resolved their immediate issues and now have a repayment agreement in place with the Spanish government to pay overdue tax.
It is probably specifically with PSG in mind that the new sanction as been introduced.
Unless the Club Football Control Body (CFCB) is astonishingly lenient, it seems likely that PSG will fail the Break Even test. As I explained in my article of 21 December, there are very good reasons why the artificially inflated Qatar Tourist Authority deal (reported to be E150m a year) will be adjusted to a 'fair value' market rate.
As the above slide pack shows, UEFA will announce the first Break Even punishments between December 2013 and April 2014. If Paris St-Germain hold the Champions League title at that time (i.e. by winning it in May 2013), it is entirely possible that they would be stripped of the title. This new punishment seems to have been introduced with this specific scenario in mind; to give UEFA the ability to take the title from a club that had won the trophy through overspending and flagrant breaching of the Break Even rules. It is also interesting to consider why the new punishment has not publicly been announced - it may be because UEFA don't wish to appear as if they are overtly introducing new rules specifically to tackle the issues of one errant club.
The above pack also potentially provides us with an interesting insight into the Break Even punishments that UEFA might apply to any clubs that fail the very first Break Even test. Back in April 2012 Alasdair Bell UEFA legal director disclosed in an interview that clubs that fail the very first Break Even test were likely to face fairly lenient punishments. He explained that initially, he expected clubs to be restricted in the number of players they could register in UEFA competitions.
Although the above slide does not carry any explanatory text - it is interesting to note that three of the sanctions are shown in a different, lighter colour text - all these three punishments fit very nicely with the approach outlined by Alasdair Bell.
It is conjecture, but it is possible that UEFA has earmarked the three lighter-shaded punishments for clubs that fail the very first FFP Break Even test (potentially including Man City). At the moment, however, it is pure speculation and we are still waiting to find out in what circumstances the various punishments will be applied.
French newspaper Le Parisien reported that Paris St-Germain have signed a huge sponsorship deal with the Qatar Tourist Authority. The four-year deal is said to be worth E150m this season, rising to E200m in the final year of the arrangement. The deal is also reported to be back-dated so that the club will receive the full E150m this season, even though deal has only just been announced.
PSG are 100% owned by the Qatar Sports Initiative (QSI), which is in turn owned by Qatar Investment Authority (QIA) – a Sovereign Wealth Fund owned by the Qatar government. Sovereign Wealth Funds are common amongst oil producing countries (even Norway has one) and exist as a vehicle for investing excess oil-revenue profits. The Qatar Tourist Authority is a government funded organisation.
This sponsorship deal has clearly been arranged to artificially boost the profits of PSG so that the club can comply with FFP rules. PSG are heavy spenders and without the huge deal would fail the FFP test in the first Monitoring Period. However, the scenario of owners (or parties connected to the owners) artificially inflating income was envisaged when the FFP rules were drawn-up. Under the rules, this is called a Related Party Transaction. On page 85, the rules define a Related Party as follows:
3 a The entity and the reporting entity are members of the same group (which means that each parent, subsidiary and fellow subsidiary is related to the others);
b) One entity is an associate or joint venture of the other entity (or an associate or joint venture of a member of a group of which the other entity is a member);
It therefore seems likely that the Qatar Tourist Authority would be classed as being Related to QSI. Under the rules, all Related Party Transactions have to be reviewed by the UEFA Financial Control Body (EFCB). This body is required to review all Related Party Transactions and identify a ‘fair value’ for the transaction – where this differs to the amount paid, the transaction will be adjusted for the purposes of the FFP test. So, assuming the rules are applied strictly as per the UEFA FFP rulebook, we would expect the deal to be adjusted downwards. [Note: the EFCB will also be responsible for reviewing Man City's £12.8m 'Intellectual Rights' Related Party payment revealed in my 16 Dec article.]
Of course it won’t be easy for the EFCB to identify a fair value for the deal. However there are precedents and in December 2012, Atletico announced a new sponsorship deal with Azerbaijan which was reported to be worth E20m a year. As a result, the club now wears shirts bearing the logo "Azerbaijan, land of fire"* . PSG may well find that their E150m-E200m a year deal is adjusted to around E20m – if this happens the club will fail the FFP test and face UEFA sanction (possibly resulting in an outright ban from UEFA competitons).
There are a few other things to consider about this deal. The EFCB were deliberately set up as an independent panel (their Chairman is the former Belgium Prime Minister) so shouldn’t, in theory, be influenced by political pressure. This affair isn’t going to be entirely comfortably for UEFA – if the panel do their job, they will effectively be branding the PSG owners (the Qatar government) as a body that is not playing by the rules. It could then, potentially ban the Qatar government’s football team (PSG) from UEFA competitions. Given that FIFA have given Qatar the 2022 World Cup and also Platini’s desire to head-up FIFA in 2015, it could all get rather messy. Hence UEFA’s desire for the EFCB to be entirely independent.
It’s hard to be precise about the number of genuine tourists that visit Qatar. The Tourist Authority suggests the number may be as low as 60,000 this year and up until recently there were only 5,000 hotel beds in the country. Even if higher estimates are correct and 400,000 visit Doha each year, the PSG deal works out to a spend of around E440 per current visitor. Although Qatar is more progressive than many Middle-East states, alarm bells sounded last month when poet Al-Jami was jailed for life for criticising the ruler.
*presumably "land condemned by EU for Human Rights violations" was just too long.
Back in May, I published a projection on whether Manchester City were on track to meet the FFP criteria. Now that the club’s financial results for last season have been released, it seems a good time to revisit the original projection and look again at the club's FFP challenge.
On Friday, City officially announced a loss of £99.7m for the season 2011/12. Interestingly, many journalists were not impressed that the figures were released late on a Friday afternoon in an apparent, though fairly successful, attempt to minimise critical analysis of the information. Putting this issue aside, we can now look at the accuracy of my original projection and whether there are any 'oddities' hiding in the accounts (spoiler alert: there are several).
I have attached my original projection and added two new columns on the far right of the table below – ‘2011/12 Actual’ and the’ Difference’ (so we can see how far out I was).
The first thing to notice is the fact that my projection was out by £ 21.7.1m (figure in bottom right). City’s losses were £99.7m rather than the £121.4m that I projected. That seems like a lot – however, when you look at the detail, it was not as far away as it first appears.
I underestimated the uplift from TV and commercial income by £8.9m. These figures include the Commercial uplift from winning the title and the first appearance of the impact of the Etihad deal. City have never fully released the actual figures for the Etihad contract so there was always and element of estimation in the projection.
The biggest discrepancy relates to the item shows above as ‘sale of rights to owner’. This item is particularly interesting and has not been fully explained by the club. On page 114 of the report, the club advise:
“..the Company sold certain Design, Know-How and other Intellectual Property Rights to Abu Dhabi United Group and Investment & Development Limited for £12.8m.”
Quite what this figure actually represents is unclear and critics will suggest that City may have ‘sold’ something of little real value to the parent company in an attempt to artificially inflate income (and help the club meet the FFP rules). However, under the FFP rules ‘Related Party’ transactions have to be reviewed UEFA panel and this item may ultimately have to be adjusted downwards (potentially to zero). There may also be a further debate over this item and whether it is ‘relevant income’. The FFP rules permit clubs to include revenue received from football-related activities. The rules are somewhat vague but it is possible that this item would technically not be classified as ‘relevant income’ for the purposes of the FFP test. Understandably, I had not anticipated this item in my original projection and this was the main area of variance.
City’s wages increased by nearly £28m. I had been rather conservative and projected only a £20m increase.
Overall, if we exclude the £12.8m Related Party transaction, the original projection was a net £8.9m out. This figure equates to around 3.8% of Turnover and, all things considered, is a fairly pleasing result.
As readers of this site will be aware, FFP rules allow for certain expenditure to be excluded from FFP calculations. These are:
- Wages for players signed before June 2010
- Depreciation of Fixed Assets
- Expenditure on youth and community activities
Again, late on Friday afternoon, City provided journalists with the figures for the exclusions, together with some helpful explanatory ‘spin’ (which was reproduced unchallenged and word-for-word by three news outlets).
City advised that Pre-June 2010 wages were £80m and Youth and community & Depreciation activities totalled £15m. Again, we should look at how these figures compare to my original projection:
My original projection and the Actual figure differ by £24.1m. The Youth and community development figures were always a ‘finger in the air’ estimate – however they appear to have been fairly close. The main discrepancy relates to the amount of wages City paid to players in 2011/12 on contracts signed before 1 June 2010. The FFP rules permit the wages for these long-standing players, paid during the 2011/12 season only, to be excluded from the FFP calculations (as long as the contract was not subsequently re-negotiated or extended). So why was there a £27m discrepancy between my calculations and the £80m figure released to the press on Friday? Who were the players involved and did City really pay £80m to these players on pre-June contracts?
In my original projection, I used Swiss Ramble’s figures for projected wages for the players on pre-June 2010 contracts (the pale blue columns). The columns on the right (pale green) show how much the wages would need to be for City to have paid them £80m last season (as the club claim).
It seems extremely unlikely that the club would have paid £80m in wages to these players – the weekly salaries are simply too high. The £52.5m figure looks much closer to reality. We should also consider that the top-earner Tevez had his salary withheld for an extended period during the season. Although the club paid players a bonus for winning the title, the bonus for the entire 24-man playing squad equated to only £6.2m.
On the face of it, City’s claim to have paid these players £80m simply doesn’t seem at all credible.
Player Contract Write-down
In the previous year’s accounts (i.e. those released 12months ago, relating to 2010/11), the club reported one-off ‘exceptional items’ totalling £34.4m. Of this figure, £29m related to ‘impairment of player registrations’ – i.e. the one-off write-down of players who the club considered had no resale value. This write-down was performed immediately before the start of the first FFP Monitoring Period and had the effect of reducing the players Book Value (and Amortisation) to zero.
Swiss Ramble believes Santa Cruz and Bridge are included in this figure. Although this ‘write-down’ is perfectly acceptable for accounting purposes, it is not permitted under the FFP rules (a player has to be amortised evenly over the life of the contract, i.e. until the contract ceases to exist). Under FFP rules, Santa Cruz and Bridge should be amortised at the combined rate of £6.5m a season (or £13m over the two-year Monitoring Period). However City’s recently-released accounts do not contain this expense. It is interesting to speculate whether City will go out of their way to make the UEFA Licensing panel aware of this treatment and volunteer the fact that an additional £13m needs to be added to their expenses when the Break Even test is carried out.
Now the accounts for last season are available, we can produce a much more informed projection of whether they are on course to meet the FFP test.
Based on the assumptions outlined below, City would fail the FFP test by around £68m. This projection carries a few health-warnings and assumes there are no player sales or purchases during the forthcoming transfer window.
In producing the above, I have assumed City finish second in the Premier League (this seems sensible as City are currently second-favourites with bookmakers to win the title). I have assumed Turnover is flat (there will be fewer games owing to the early exit from all UEFA competitions; the TV Merit payments will be lower and a sizeable portion of last season’s Commercial Income uplift resulted from winning the Premier League plus the new Etihad deal). Although City made a net spend of £39.4m during the summer (page 114 of the Annual Report), wages or amortisation don’t appear to me to have changed. City also don’t appear to repeated the £10.6m profit on player sales that they achieved last season (indeed, depending on the treatment of Adebeyor, it is possible the club will actually report a loss on player sales of around £7m). I have assumed a reduction in wages compared to last season to reflect the fact that a bonus for winning the PL would not be paid should the team finish second. For the purposes of the projection, I have used City’s somewhat implausible £80m figure for the exclusion relating to wages for players on pre-June 2010 contracts. I have assumed that the club don’t repeat the sale of ‘Intellectual property’ for £12.8m next season.
If the above assumptions were to prove correct, the loss after Tax and Interest would actually increase next year compared to this (£116m compared to the £97.7m recently reported). Although it is fairly close, if this were to happen this would be significant as only if losses are trending downwards could the club make use of the provision in Annex XI which allows the club to exclude the pre-June 2010 wages (£80m). In this scenario, City would actually miss the FFP target by around £148m)!
Given the above figures, it is interesting to speculate on what City could pull out of the bag to enable them to hit the FFP targets. So far, their critics would suggest City have used the following techniques:
· Significantly increased sponsorship from potentially a Related Party (Etihad)
· Write-down of players contracts outside of the FFP rules
· Seemingly inflated pre-June 2011 wages
· Sale of Intellectual Property to club owners.
Given the club’s stated confidence in their ability to meet the FFP criteria, it will be interesting to see what other techniques the club uses to get themselves over the line.
Two of the Premier League's top clubs are sponsored by airlines based in the UAE. Arsenal are sponsored by 'Emirates air line', based in Dubai, whilst Manchester City are sponsored by 'Etihad airways' based in Abu Dhabi.
Both airlines are owned by the state/ruling family and exist for largely geopolitical reasons. It is debatable whether either airline makes a genuine profit and each serves to promote the UAE state and their own principality on the world stage. The airlines promote a image of luxury and sophistication and operate as a lavish PR vehicle for their state.
It is interesting to ponder, for example, whether Saudi air would be an appropriate Premier League sponsor? What about Iranair or Myanmar airlines? What about Barcelona's new shirt sponsors Qatar airways? Although Qatar are set to host the World Cup, homosexuality is illegal (although that hasn't stopped PSG becoming owned and sponsored by the Qatar sovereign wealth fund).
Premier League Chairmen met on Thursday to discuss implementing spending constraints into the Premier League. Clubs have become noticeably more positive about the prospect of spending restrictions over the last two years and the Premier League executives (notably Peter Scudamore) have had to change their stance on the issue.
Although most club owners now believe some kind of restriction is going to benefit them, finding a single approach that will be acceptable to 14 of the 20 Premier League clubs is proving to be extremely difficult. Steve Parish at Crystal Palace described proposal discussions on FFP for the Championship was “like herding cats” and the process is turning out to be even harder in the top division.
Four clubs are totally opposed to any spending constraint: Man City, Fulham, Aston Villa, West Brom. In addition, Everton are reported to be wavering. However, having 15 or 16 clubs broadly amenable to the concept of capping expenditure is long way away from reaching an agreement about what the measure should be.
It is interesting to see that Reading and Southampton are not amongst the clubs opposed to spending constraints. These clubs were the only ones that voted against the FFP measures for the Championship earlier in the year. This volte-face probably illustrates the level of vested interest that exists – despite Swansea Chairman’s talk of taking action ‘for the good of the game’, clubs will only agree to any change that they feel is going to favour their own specific position.
There are a number of possible approaches and each one is going to be more or less favourable depending on the particular circumstances of the club. The proposals so far discussed include:
- Break Even rule (which would favour Man Utd and Arsenal) but help smaller clubs
- ‘No increasing debt rule’ (which would favour Chelsea and Man City) but help smaller clubs
- Linking wage increases to the increased TV deal (which would generally favour the larger clubs)
- Capping wage spending to a proportion of turnover
With so many vested interests and each approach likely to favour a different sub-set of the member clubs, it looks difficult to see how common agreement will be reached when the clubs next discuss the proposals in February. To add to the problems, Al-Fayed (Fulham’s owner) is reported to be so oppose to the proposals that he is currently threatening legal action. Al-Fayed believes that under EU restraint of trade rules, he should be able to spend money as he chooses (it is worth noting that Fulham are £193min debt to Al-Fayed). From a purely legal perspective, he may well have a point.
Even if clubs could agree on a common approach, they will also need to agree the punishment for non-compliance. Unlike UEFA competitions, club can’t be excluded from PL competition. However, Championship and League 1 & 2 Clubs have adopted a transfer-ban as their primary sanction and it seems likely that this would form part of the punishment.
For more information and background I would recommend Daniel Geey’s article on the available Salary Cap options and possible sanctions.
Financial Fair Play radio show
I was the studio guest at BBC Radio London recently for a 50minute show dedicated entirely to FFP. There are really good interviews with Steve Parish of Crystal Palace (11mins) and Matt Porter at Leyton Orient (27.30 mins). In the interview Matt Porter explains what life is like under the new regulations and describes the FFP rules "probably the best thing to happen to lower league football in the last decade".
Last week Diego Tarì (twitter @Tifbilanciato) had a significant scoop on his site www.tifosobilanciato.it when he published a club-by-club breakdown of Italian TV revenue for Serie A in the 2012/13 season. The story was quickly picked up by various sites including Italian sport newspaper Tuttosport. The Tuttosport article (in Italian) is attached here:
2012 10 26 Tuttosport article.pdf
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This information is particularly interesting as the breakdown of TV revenue is never usually published in Italy (unlike the PL, where the information is freely available).
I have converted the Serie A breakdown from euros to pounds and all figures are in millions:
The first thing to note is that, unlike the Premier League which determines the final split at the end of the season, the Italian totals are determined before the season starts based on historic information.
There are five elements that contribute to the overall deal. The split is as follows:
Fixed Amount Element
Like in England, each club receives a an equal basic revenue element. In Italy each club receives £15.2m.
Supporters Index Element
This is the largest pot (25%) and is the most contentious part of the distribution. Its calculation is far from transparent and has been described as ‘one of the best kept secrets in Italian democracy’. It is compiled by three different research companies - Italians are polled to determine whether they are a football enthusiast and, if so, which is their favourite team. It doesn’t take into account average crowd size and is purely based on respondents preferred teams. The research calculated that there are 37.6m ‘football fans’ in Italy (out of a population of 60.6m).
The Supporters Element creates a significant disparity in income – Juventus have considerable national support and receive £45m from this pot (compared to just £1.2m from unfashionable Siena).
This element allocates revenue based on Province size, rather than the actual population of the town/city. As we would expect the two teams in Turin (Torino and Juventus), receive the same revenue from this pot. The big winners are Roma (£5m) whilst Siena and Chievo receive just £300k - there is nothing clubs can do to increase the size of their payment from this pot.
Last season performance
As in the Premier League, there is a pot that allocates revenue based on a club’s League position. However in Italy it only accounts for 5% of the revenue and any team that punches above its weight and achieves a high position, receives rather scant reward. The difference between winning the Scudetto and finishing bottom is only £3.4m.
Last 5 seasons
15% of TV revenue is allocated based on League position attained over the previous 5 seasons. The established large teams again receive the largest share of this pot. Udinese receive some reward for their recent good performances, having qualified for the Champions League for the last two seasons.
Historical Results Element
10% of the revenue is determined by league placings since 1946. Again, Juventus and the Milan clubs receive the biggest pay-outs. Interestingly, Torino, who had a strong 70’s/80’s and were the dominant force in Italian football in the1940s also did well in this category.
Clearly, the Italian distribution method heavily favours the status-quo. Juventus, for example, receive over 4-times the revenue of lowly Pescara. The traditionally large clubs are continually rewarded for having a large number of ‘supporters’; coming from large provinces, and for their past performance. It would be virtually impossible for a club to break into top tier of clubs on a long-term basis. League position on its own has little bearing on the amount a club receives. Teams can occasionally have a good season or two but cannot compete long-term. Chievo finished 5th in 2002 and 7th in 2003 – a quite remarkable performance that couldn’t possibly be maintained over a prolonged period.
It is interesting to compare the overall Italian TV rights club pay-outs to those in the Premier League:
Despite the Italian pot being 22% lower than the Premier League TV revenue, top earners Juventus receive £22m more than Man City. AC Milan received £10m more than the Manchester clubs. Clubs in in 3rd to 6th place all receive around the same across the two leagues. Where the real disparity lies is from teams from 7th place down. Wolves receive double the TV income to the bottom-paid team in Italy and half the Italian teams receive around £17m a season less than their English counter-parts.
The Premier League appears to be a model of equality compared to the Italian system. In England, the difference between top and bottom is only £21m, with City earning just 1.5 times Wolves’ earnings (compared to Italy, where Juve receive £63m more than Pescara (4.2 times their revenue).
The English TV breakdown is fundamentally quite different to the Italian model.
Equal Share & Overseas TV
The Premier League gives each club an ‘Equal Share’ payment and also equal distribution of Overseas TV income. Each club received £32.6m irrespective of league position or how many times they appeared on TV.
The Facility Fee is determined by how many times a club appears on Live Sky games. The difference between top and bottom is fairly small with on £7.5m separating Man Utd and the 10 clubs who received the lowest payment.
The Merit Payment is determined by final league position, with each place worth around £1.2m. The top team receives 14.4m more than the bottom team. In Italy this pot is significantly smaller and the difference between top and bottom is only £3m. Swansea were over-achievers in the Premier League last season and received £7.5m for their 11th place finish (compared to £1.8m in Italy paid to a team with a similar finish).
With some justification, the Premier League prides itself in the fairness of itsTV distribution. Compared to Italy, the Premier League appears to be a rather egalitarian Utopia.
What if the Premier League adopted Italy’s model?
It is interesting to speculate on how the TV model would look in England if the Serie A model were in place here. Applying the Italian model to the Premier League isn’t entirely straight forward. We don’t have the all-important ‘Supporters Index’ so have to make do with an educated approximation. The remaining information required to construct the payment table (such as population size and historic results since the war) are all freely available.
Assuming the size of the TV revenue pot is not changed, the Italian model makes the Premier League TV distribution look like this:
Five of the top six teams would gain significantly under the Italian system. The only exception is Man City who probably have the lowest national fan base to the current top teams. Arsenal and Man Utd would be set to gain the most due to their large national fan base. Arsenal also have the benefit of coming from a large city and have very good Historical Results.
At the other end of the payment table, other than Aston Villa, all clubs below 8th receive less under the Italian Model. Villa would gain as they would score highly in the Supporter index; are from a large city, and score well in post-war results. The big losers would be Swansea – they would be nearly £22m worse off and end up being the poorest rewarded team, despite their good league position last season.
There are some other anomalies caused by the calculation of the Population pot.. The London clubs all do well in this pot and, for example QPR receive over £4m more than Newcastle and Liverpool by virtue of coming from a larger city.
To English eyes, only a fairly myopic Arsenal or Man Utd fan would argue that the Italian model has anything to recommend it. Clubs struggle to compete at the top-level as it is and over time the Italian model would probably result in an entrenched elite of five or six clubs. Long-term, it would also be very difficult to knock Arsenal or Man Utd of the top of the table long-term.
What if Italy adopted the Premier League’s model?
It is also interesting to consider what would happen in Serie A if Italy adopted the Premier League’s seemingly fairer model.
Other than one element it is a fairly straight-forward process to apply the English model to Serie A.
The immediate impact would be at the top end, with Juventus an eye-watering £31m worse-off. Milan and Inter would also be significant losers. However, only 6 teams would be worse off and Parma, Chievo and Udinese would rightly rewarded for their high league table placing last season.
Under this system, the lowest payment would be £29m, compared to just £19.8m under the current system (representing a welcome 46% increase in TV revenue for Pescara). As we would expect, the gap between the top and bottom earnings shrink dramatically.
The one problem area when overlaying the Premier League model onto Serie A relates to the Facility Payment element. This pot is determined by the number of times a team is shown on a Live TV game. The purpose is three-fold:
- To reward the larger clubs (who are more-often selected for a Live game)
- To reward teams who are doing well in the League (as their games are also more-often selected)
- To ensure all teams get some payment from this pot ( as all Teams must be shown a required number of times)
In Italy, all games are shown Live, so this pot is not directly comparable. If Serie A were to adopt the PL distribution model principles it would need to find a similar, proxy measure (potentially based a weighted mix of club club attendances, supporters and the league position), whilst ensuring there are no teams who receive excessively high or low allocations from this pot. For the purposes of the above model, I have allocated the Facility Fee payments in a manner that is consistent with the current Premier League Facility fee levels and process.
As an aside, it is interesting to note the impact of the Overseas TV deals. These are paid to clubs as a separate pot in the Premier League and are worth a huge £376m to English clubs, compared to the £92.8m (E116m) secured by Serie A.
Although the Supporter Element seems unfairly skewed to the big clubs, it is not likely to change any time soon. In June 2011, the method for calculating the Supporters Element caused some heated debate with the large clubs successfully forcing through a change in the way the payments are calculated.
Payment had previously been more heavily weighted towards attendance figures but the Italian giants were able force the smaller clubs into increasing the weighting of the survey question that simply asked football enthusiasts to 'name their favourite team'. The discussions got rather fierce and there were allegations that the smaller-to-medium clubs only accepted the change after the large clubs threatened to blacklist non-compliant clubs and to stop buying any players from them in future. Transfer fees represent a significant source of income for many of the smaller clubs and any ‘blacklist’ would have had a huge impact on the affected clubs. The change to the Supporters Index was made in November 2011 and since then Napoli (one of the ‘squeezed’ middle-ranking clubs) has twice unsuccessfully attempted to have the Supporters Element change overturned to it could gain a higher share of the payments.
It is also interesting to consider the concept of the Benefactor Ownership model in relation to the two leagues. In Italy, the payment for achieving a high league position is only 5% of the total pot, so it would require an owner to have very deep pockets if they wished to fund a small or middle-size club so they could reap the full financial rewards for their club’s success. In Italy rewards are not as instant, with payments being based on elements that would take serious time to change (such as national ‘supporters’, 5 year results and post-war table positions). However, in the Premier League a club is rewarded almost instantly via the Merit Payment and the Facility Fee for success on the field.
Interestingly, the fairness of the TV fund distribution actually makes the Premier League a much more attractive proposition for a potential wealthy owner. If we had a less egalitarian distribution of TV funds, we would probably have had fewer wealthy individuals choosing to inject their money into clubs such as Fulham, QPR, Stoke and Bolton.
Ipswich used to be one of the most envied club in the Football League. They have an impressive history, winning the League Championship in 1962, the UEFA cup in 1981 and the FA Cup in 1978. They were also the League runners-up in runners-up in 1981 and 1982. Even though they are now struggling in the Championship, they still get average gates of around 17,000 – an amazing feat for a town with a population of just 155,000. That works out to around 11% of the entire population attending their home games – on that basis, an equivalent crowd for Leeds would be around 75,000!
However things have taken a marked turn for the worst recently. To illustrate the problem I have attached a summary of the last published accounts. The most recent accounts run up to 30 June 2011 and we can expect the accounts that relate to the 2011/12 season next month – however they are unlikely to make very happy reading.
Note: the figures are in given thousands so, for example, '6,638' represents £6,638,000
Even if you aren’t familiar with looking at accounts, there are a few things that jump out. The wages paid to by the club exceeds the Turnover (i.e. the total ordinary income from the club). Wages exceeding or equalling turnover is a crazy situation for the club to be in for any prolonged period of time. The club simply won’t be able to even cover the admin expenses of running the club – it is real danger sign if wages are anything over 60/70% of Turnover. In League 2, clubs are currently given a transfer ban if this happens (link).
The text in the club accounts inform us that Ipswich was nearly £67m in debt on 30 June 2011 (and the debt is likely to have grown since then). During 2010/11 the club paid out £3.4m in interest to cover the debt. This is a huge amount given that Match Day Income/Gate receipts has been in the region of £6.6m. It must be a thoroughly depressing prospect to look round the ground and know that two of the four stands are solely paying for interest on the debt.
Looking at the figures, Ipswich Town appears to pay Evans around 5.4% interest on the debt – this is a little below the market rate for this kind of debt but is still a substantial drain on the club. The approach to charging interest on debt varies across ‘benefactor owners’. Other owners including Al Fayed at Fulham and Abramovic do not charge their club any interest on the debt, whereas Bolton and Villa pay around £5m each year on their approx £100m debts.
Despite selling Connor Wickham as part of the £10.8m profit on player sales, the club still came no-where near breaking even last year (although without this huge player-trading profit, the club would have repeated the previous season’s £14m loss).
It is probably worth explaining the Amortisation figure shown above (Ref 5). When a club pays a transfer fee it will not record the fee paid in one go in the accounts. The club has to depreciate/amortise the purchase price over the life of the contract. So a player signed for £3m on a 3-year contract is amortised at a rate of £1m a year. It is clearly good to see this figure reducing but like wages, it is generally hard to change this figure quickly owing to the duration of player contracts.
Oddly, there appears to be an anomaly in the accounts. Ordinarily the elements of the ‘Cost of SaIes’ figure (shown in the accounts on page 8) can be easily reconciled to the expenses listed in the accounts. However there was an element of the Cost of Sales figure which I cannot locate in the accounts (around £1.9.m) - see note 9. Frustratingly - it looks like it is some kind of administrative cost to do with the running of the club (such as paying up old contracts or paying-off an old manager). I have attached the club accounts and would welcome anyone’s input to this.
Ipswich Town FC 30 June 2011.pdf
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We should be able to reconcile the 20,929 (i.e.£20m) Cost of Sales figure shown on page 8 of the accounts to the figures in the accounts (i.e. items 4,5,6,7,8, should add up to 20,929).
I suspect this significant £1.9m expense may be due to the cost of paying-off the contract of Roy Keane but can’t be sure. I would expect the accounts to detail this kind of expense as an Exceptional item – it almost looks like the club are trying to hide this £1.9m expense (but as I say, I can’t be sure quite what it is).
Since June 2011, the club have evidently tried to tackle the wages costs and have managed out Grant Leadbitter, Jimmy Bullard, Lee Bowyer, Jaime Peters, Ivar Inginmarsson, Damien Delaney, Ibrahima Sonko, and ended loans of David Stockdale, Danny Collins and Keith Andrews. In addition to that, Carlos Edwards and Jason Scotland have signed contracts which halved their wages and these players have been replaced by Scott Loach, Elliot Hewitt, Luke Chambers and Paul Taylor, as well as short term loanees and 2 season long loanees in Guirane N’Daw and Massimo Luongo. Financially, this is all good news for the club but the full benefit of the change won’t appear in the next published accounts and the club might have incurred expenses when paying-up some of the contracts.
When owner Marcus Evans took over the club in 2007, the club were £32m in debt –under Evan’s ownership, this figure has more than doubled (and looks set to increase further in the next accounts). It is always difficult to gauge the personal wealth of any business person – although in 2010 the Times Rich List estimated he was worth £500m. However these estimates are often highly inaccurate and we simply don’t know how deep his pockets are. Interestingly, the accounts show that £67m debt is all owed to Evans and he has not converted any of it to equity.
One of the main issues for Ipswich has been the continued ability to get further and further into debt. The new Financial Fair Play rules in the Championship will at least make it harder for misguided owners to grow the debts of the club. Many would argue that the plight of Ipswich illustrates the potential benefits of Fan Ownership as a fan group would simply not have been allowed to grow the debts in the way Evans has done. However, it is very difficult for fan consortia to get started as they generally lack the funds required to run a club with existing debt and high expenses. Unfortunately Fan Ownership generally only occurs after the club has had a financial melt-down and shed most of its running costs (eg Exeter City and potentially Portsmouth).
Refreshingly, there are distinct signs of fan disenchantment and mobilisation. A fan group @Turnstile_Blue has launched a one-off fanzine to highlight the mismanagement of the club and attempt to gain greater say in the running of the club –it is a very good read and can be downloaded from here.
I am grateful to @joefairs or his help with the club-specific information for this article.
- Lack of profit made from player sales - the club have previously received healthy income from player sales made for above their Book Value. However the club doesn't appear to have made a profit on any player sales during Summer 2012.
- Further increased amortisation and wage cost, largely as the result of Summer 2012 spending.
- Reduction in Champions League prize money in 2012/13 compared to 2011/12.
Chelsea look set to fail the test by around £33.7m - i.e. around 94% over the permitted £36m loss.
As readers of this site will be aware, there are 8 available UEFA punishments. However, one of the key FFP questions is whether UEFA will actually ban a an overspending club. Important clarification has been provided in an interview with Alasdair Bell, UEFA's director of legal affairs.
Bell explains that he believes that any club that exceeds the Break Even limit by more than 20% will face the most severe punishments. In practice this means that during the current two year Monitoring Period, a club will need to be about £7m over the £36m maximum Break Even deficit to invoke the stiffest of sanctions.
The most severe of the punishments is,of course, a ban from UEFA competition. However Bell explained in the interview that he believes that initially a less draconian punishment will be applied and that clubs face a restriction in the number of players they are allowed to register for the Champions League/Europa Cup games. Potentially a team's squad could be reduced from 25 players to 20 players.
Bell explained that only if a club is a repeat offender will a more serious punishments be applied.
This interview appears to be the only statement from senior UEFA officials on how the sanctions will be applied and Platini has yet to confirm this approach. However Bell is sufficiently senior to assume that he was speaking 'on message' and that the sanctions will be applied as he outlined.
This will all be a great relief to Manchester City who according to club insiders are set to fail the Break Even test (scroll down the article). The problem for Man City was always going to be the first Monitoring Periods - after that it is possible that they can maximise their commercial income, reduce spending and come close to breaking even. However, with City potentially set to miss the Break Event test by around 100%+ (as oppose to 20%). it will be interesting to see if UEFA are happy to apply the same punishment to all clubs that miss the initialy test by more than the 20% (£7m) threshold.
For English clubs, the huge new TV deal is significant. The uplift in income arising from the deal will arrive next year and, assuming clubs continue to reign-in their spending, the increased income should materially help them all to meet the test. This scenario, of course, only applies to the Premier League clubs and doesn't apply to other big spenders PSG and Zenit. Interestingly, Bell disclosed the proposed punishments before the English TV deal was announced and it will be interesting to see if his approach changes - particularly if clubs challenge Bell's proposals as being over-lenient.
The internet is full of ‘crack-pot’ ideas, from personal jet-packs to underwater hotels (as proposed by Joe Cala, one of Pompey’s former prospective owners proposed).
Occasionally some of these ideas take root. Back in November 2011, Blogger Maracanazo proposed an alternative FFP punishment to the outright ban suggested by the rules. He suggested that overspending clubs could be docked points from the group stage of the Champions League or Europa League. Perhaps Platini reads his site, because this exact-same punishment was subsequently proposed and agreed by UEFA.
Indeed, FFP itself is a rather odd set of regulations. Broadly, the aim is to tackle overspending, by restricting clubs’ spend on players wages. However, owing to the complexities of EU laws, an outright salary-cap would inevitably fail the ‘restraint of trade’ test. UEFA’s FFP rules instead requires clubs to broadly break-even –thereby introducing the desired ‘salary cap’ by an alternative and legally acceptable route.
Recently, the age-old discussions on having a quota system of English players within the Premier League have recently resurfaced. Roy Hodgson expressed concern that the new Premier League TV deal would result in clubs making big-money non-English signings. He felt the deal would restrict the number of available English players that he could select. However, as we all know, any strict quota would fail the ‘restraint of trade’ test. So, given Platini’s success in implementing a soft ‘salary cap’, is there an alternative approach to a quota system that would deliver the same results?
This brings me onto my own ‘crack-pot’ idea which was formulated some time ago during an evening in the pub. Not a promising start, but rather than leave it on the hard-drive, I thought it worth a wider audience.
The idea is as follows:
Brits for Six© Scheme
Under the Brits for Six scheme, Premiership teams would be free to play players of any nation but have the possibility to receive bonus points. The bonus points would be awarded if they meet the required criteria for playing players who are eligible to represent the one of the Home Nations countries.
Teams would receive a maximum 6 bonus points during a season if they start a required number of games with 6 or more players who are qualified to play for a country in the British Isles.
How it would work?
For the purposes of the bonus points only, the season is split into 4 sections.
Section 1: Games 1-10; 2 bonus points available
Section 2: Games 11-20; 2 bonus points available
Section 3: Games 21 to 30; 2 bonus points available
Section 4: Games 31 to 38; no bonus points available
The bonus points would be applied immediately after Game 10, Game 20 and Game 30.
Qualifying for the bonus points
To receive the bonus points, the club will need to start 6 or more games within a 10-game Section with 6 or more qualifying players. N.B. A qualifying player is one that is eligible to represent any of the Home Nation countries.
Teams need to start the required number of games with the required number of qualifying players to be eligible for the points - teams are able to substitute a qualifying player during a game without affecting their eligibility for the bonus points.
Only two bonus points are available during any 10 game section – it is not possible to be awarded 1 point (i.e. clubs receive either 2 points or zero points during a Section). The maximum total bonus points a team can win over the season is 6.
Clubs do not have to aim to achieve any bonus points and would be free to field an entire team of non-qualifying players if they wish (although they would not qualify for the bonus points).
I suspect the idea may well struggle to pass the key ‘restraint of trade’ test. An overseas player would have less opportunity to earn appearance bonuses that their Home Nations colleagues. Even if that issue could be overcome would UEFA be happy to accept teams into the Champions League based partially on points awarded for fielding British players ahead of those from other nations? The idea might need to be downgraded to award bonus points for English players only (rather than British players).
Although the idea is probably best left in the ‘unfeasible’ file, it does raise the question of whether there is another way to achieve the goal of a higher representation of English players within the Premier League.
However if Mr Scudamore wishes to consider Brits for Six (or a variation), he is more than welcome, and now knows where to send the cheque.
Back in May I published an assessment of Liverpool's finances and a projection on whether they were on track to pass the FFP test (link). I pointed out that things were very tight and to meet FFP requirements the new manager would certainly not have 'war-chest' for new signings - existing players were going to be sold so he could bring new ones in. Since then, the club's owners have issued an 'open letter' to fans to outline the position to supporters (including an explanation of their desire to comply with FFP). With the Transfer Window now closed, it seems a good time to review the financial impact of the club's transactions.
With the help of Liverpool supporter @mdonald1987 I have attached details of the net impact of the Summer transfers on Liverpool’s profitability for the current season. Note: If you aren't familiar with how players are shown in the club accounts please read the paragraph at the end of this article.
The transfers have had an impact on three components of the club’s accounts: Wages, Profit on player sales, and on Amortisation.
Note: ‘Profit/loss on players sold’ is a line in the accounts that relates the profit above the Book Value for a player when sold (see end of article for an explanation on how this works).
Note: If you are new to the concept of Amortisation, refer to the end of the article.
The tables above show the impact that the Transfer Window transactions will have on the current financial year (i.e. the current season). When all transactions are considered (including the reported £2m loan fee for Carroll) Liverpool are a net £7.6m better off. It hardly needs pointing out that this isn't a huge amount - certainly not the £20m saving that some have quoted. Interestingly, annual wages have reduced by around £18m as a result of the departures. However, this was partially off-set by the £12m spent on incoming and returning players. Liverpool made fairly modest improvements to their Amortisation and made a small profit on the Book Value of the players sold.
Of course, the figures carry a health-warning and can only-ever be an approximation. The transfer fees are based on media reports and the wages are based on a mix of reported figures and estimates. Also, there may have been transactions that were not released and could possible affect picture - for example did Adam receive a portion of the fee (he doesn't appear to have submitted a transfer request)? Was the Carroll Fee £1m, £2m or £3m? It is also important to remember that Liverpool had to pay around £5m compensation to Rogers (something I had not included in my previous projection).
This brings us to Dempsey deal. A number of journalists and fans have questioned why the owners were haggling over what appeared to be a fairly paltry sum. However, when you consider the impact of the transactions that did go through, you can perhaps understand why the club wanted to keep things tight. Assuming a £5m up-front fee and approx £70k pw wages, the Dempsey transaction would have added around £5m to costs this season. However, as my projection (below) shows, the club did appear to have just enough FFP leeway to secure the deal and this suggests the deal may not have fallen through entirely due to financial constraints.
I have attached an updated financial projection which incorporates the information and is based on the projection I produced in May (link) and are based on the account period end of 31 July.
*see notes from article in May for more information on these items
The projection predicts that the club is set to pass the FFP test by around £12m – this is still pretty tight. The projection assumes a 6th place position and the club needs to ensure that their final league position broadly matches last season (remember that each league place is worth around £725,000). However the figures do suggest that there is some scope for some fairly modest expenditure in January. For Liverpool, next year's TV deal clearly represents the cavalry riding over the horizon for Liverpool. The club should be in much better position next season – we are currently in a season of repair and transition, following the excesses of the Comolli era.
Update 14 Sept:
In July 2012, Liverpool announced that they had changed their accounting period end from 31 July to 31 May, to better align their income streams to the timing of receipts. As a result the next published accounts will cover 10 months only (from 1 August 2011 to 31 May 2012). Consequently, the next published accounts will show wages and amortisation at a lower level than shown above. Receipts from pre-season tours and some season ticket sales will not be included appear and some commercial income may be reduced. Overall, the change will help the financial position as portrayed in the Annual Accounts, mainly because two months wages will not now be included - however the change will also make a like-for-like comparison much more difficult for Liverpool fans.
Amortisation and Book Value
Under FFP rules, transfer fees have to be written off evenly over the life of the contract (a bit like a car is depreciated over time). When the accounts are produced, only the amount of depreciation (termed 'amortisation') is charged against the profits for the year (rather than the entire transfer fee). A club might buy a player for £20m on a 4-year deal but the club will only charge £5m against the first year's profits (with a further £5m expense recorded in the three subsequent years). A player's value is written-down over time (termed 'Book Value'). When a player is sold, the difference between their Book Value at the date of sale and the selling price is accounted for as a 'profit or loss on player sales' in the accounts during the year they are sold.
The term “Financial Fair Play” is often used when talking about the need for a club to meet UEFA’s Break-Even requirements. However, UEFA’s FFP rules run to around 90 pages and cover significantly more than just the need for a club to balance their debits and credits. UEFA have just announced that 23 clubs have had their UEFA prize money withheld under the banner of “Financial Fair Play”. One of the 23 is reigning Europa League and Super Cup champions Atletico Madrid. The clubs’ ‘crime’ is to have ‘overdue payables’ (material overdue tax, and transfer fee liabilities). The clubs are therefore being punished under the FFP banner for something other than failing the Break-Even test.
This is a highly significant event and strongly suggests that UEFA are serious about imposing the FFP rules in other arrears of the requirements. The 23 clubs have to provide an update on the position by 30 September and the Press Release hints at potential further punishments to come. Atletico owe around E115m in tax to the Spanish government and have reportedly agreed a E15m a year repayment schedule (at 4.5% interest). I calculate that Altletico deal will take 10 years to pay off the debt at that rate. Although FFP rules allow clubs to have ‘overdue payables’ as long as there is a repayment in place, UEFA appear to be signalling to Atletico that a decade-long repayment plan is not enough and further punishments will follow if they don’t reduce the outstanding amount by other means.
The UEFA FFP rules spell out the criteria that clubs must meet to receive a license to compete in UEFA competitions. They have put in place 8 possible punishments that could be imposed on a non-compliant club:
1 Reprimand / Warning
3 Deduction of Points
4 Withholding of Revenue from UEFA competition
5 Prohibition to register new players for UEFA competitions;
6 A restriction on the number of players that a club may register for UEFA competitions
7 Disqualification from a competition in progress
8 Exclusion from future competitions
The 23 clubs have already reached the 4th level of punishment - Paris St-Germain and Man City will be watching nervously to see how far down the table UEFA will ultimately go.
Most football fans are now broadly aware of the Break Even requirements in the FFP rules, but it seems a good time to outline the other requirements of a Financial Fair play rules.
The FFP rules spell out the minimum sporting, infrastructure, personnel and administrative, legal and financial criteria required for a club to be granted a UEFA license. Other than the Break-Even criteria, the overwhelming majority or the UEFA requirements are already covered by existing Premier League rules. So when people talk about there being no FFP rules in the Premier League, it isn’t entirely correct; it’s only really the Break-Even requirements that are not already in place. Although this might change as Premier League club directors met last week to discuss an initial proposal to introduce Break-Even requirements.
It is worth noting that the Premier League is ahead of UEFA in certain wider FFP-related areas. Following the Portsmouth debacle, the Premier League do not now allow clubs to fall behind on their tax liabilities and would even approach the tax authorities directly if that were to happen.
There is also no specific “Owners and Directors Test” within the FFP rule-book – the Premier League (post-Portsmouth and Thaksin Shinawatra at Man City) now has a very rigid test in place and uses a Business Intelligence company and Home Office sources to vet potential new owners (although, as Blackburn fans would attest, the investigations do not vet the owners for managerial competency).
In addition to the Break-Even monitoring, the UEFA rules require that a club has the following in place:
- A written and approved youth development programme
- At least three youth teams (u10, 10-14, 15-21)
- Annual medical examinations for first team squad
- Player registration for all aged over 10
- Written contracts with professional players
- Attendees at pre-season Refereeing and Laws of the Game sessions
- A racial equality practice
- A stadium for UEFA competitions within the territory of the member association
- A stadium meeting UEFA’s Infrastructure Regulations
- Year-round training facilities
- Dressing rooms and a medical room
Personnel and Administrative criteria
- A club secretary, general manager, Finance officer, medical officer, medical doctor, physiotherapist, security officer, stewards, supporter liaison officer, qualified head coach, assistant coach, head of youth development, qualified youth coach for each youth team,
- Agreed to abide by UEFA rules (inc FFP rules)
- A written contract with their football body
- Structure charts and give financial details of any subsidiary
- Annual/Interim financial statements
- No overdue payables to other clubs
- No overdue payables towards employees or social/tax authorities
- Published details of any post balance sheet events
- Financial confirmation that it is a going concern
It is interesting to note that any failure in respect of any of the above requirements would seemingly incur one of the 8 punishments (although failure to have an Under 10 team youth team for example would probably result in a warning, rather than a more weighty sanction).
It is quite common to read journalists state that a club will pass the FFP test if it is 'trending in the right direction' (i.e losses are reducing each year). However this is probably the single biggest misconception about the FFP rules. The confusion is due to something called Annex XI, a rather tortuously worded post-script added to the FFP rules specifically to help clubs comply with FFP in the early years. The most common incorrect beliefs are:
|Incorrect FFP beliefs|
|1||As long as the club is trending in the right direction and the losses are reducing, the FFP test is passed.|
|2||The wages of all players signed before 1 June 2010 are excluded from the calculations for every season|
Annex XI is found on the final page (page 87) of the long UEFA document. However I have extracted the relevant paragraphs (although it is hard going for such a short section).
UEFA FFP Wage Exclusion paragraph: Annex XI
Annex XI explained
I feel the problematic paragraphs are best explained in my diagram relating to the first Monitoring Period (where the Maximum permitted Break Even Deficit is E45m):
As we can see, if the Break Even Deficits are trending in the right direction, the club can look to exclude wages for long-standing players (i.e. those still on contracts signed before June 2010) to help them pass the test.
Note that this potential exclusion only applies only to the wages for the long-standing players paid during the one season (2011/12). For example, Tevez' wages would have to be included in full for the current 2012/13 season.
So to recap, trending in the right direction, in itself will not be enough to ensure a club passes the FFP test. 'Trending' simply allows a club to deduct wages for long-standing players paid in the season just-finished (2011/12).
This part of the rules is so-often misunderstood that I feel it is worth including some confirmation from top sports Lawyer Daniel Geey @FootballLaw from Twitter late yesterday. On this subject he said:
1..articles make reference to Annex X1 sanction examples
2. Clubs will not be sanctioned IF they have positive cost trend AND would have broken-even had it not been for pre-June '10 contracts.
3. An Annex XI positive trend by itself will not be enough to escape UEFA sanctions.
One final piece on Annex XI. Although the Annex allows the club to exclude wages from players signed before 1 June 2010, there is another reading that could, potentially help clubs; the exclusion could also extend to amortisation as well as wages. However, this is not the generally accepted reading of this and it does not appear to have been UEFA’s intention to exclude both amortisation and wages on the long-standing player
N.B. Where I refer to Max Deficit of E45m in the above diagram, I am referring to the 'Break Even Deficit' - this isn't the same thing as the total loss a club makes as it able to make a number of exclusions from the Break Even calculations (e.g. expenditure on youth and community development).
Inter’s owners, the Moratti family, have signed a deal to sell 15% of the club to China Railway in a deal that will raise E75m. In a move that appears to be deliberately designed to work around the FFP rules, the club have announced that the funds will be used to build a new 60,000 seater stadium for Inter. Inter failed to make the Champions League this season and had already been struggling to meet the FFP criteria.
Under the FFP rules, only specified types of income (termed ‘Relevant income’) can be included in the Break Even test (e.g. Match-day income, Commercial income are all ‘Relevant Income’). However, the income received from selling equity cannot be counted towards the Break-even Test.
To work round the rules, Inter will use the E75m to build a new stadium – crucially, any spend on infrastructure (such as a new stadium) is not counted as a ‘Relevant expense’. This means the funds spent on the stadium will also be excluded from the Break Even test. If Inter had simply spent the money on wages and transfer fees (all ‘Relevant expenses’) they would have failed the FFP test.
UEFA are unlikely to be perturbed by the Inter deal and will probably welcome the deal. The FFP rules are deliberately designed to favour expenditure on income-generating infrastructure projects over player wages and transfer fees. Once built, the new stadium will generate additional Commercial income for the club and help them meet the FFP test long-term. The existing San Siro is ageing and doesn’t allow the club to effectively exploit commercial opportunities through corporate packages. Naming-rights for the stadium will inevitably be up for grabs (something not easily maximised with the shared San Siro). However this deal won’t help them in the short term and back in September 2011 Massimo Moratti advised they were struggling to meet the first FFP Monitoring Period test – failing to get into the Champions League in 2012/13 will not have helped.
Sunderland recently made a surprising announcement that they unveiled their new £20m-per-season sponsorship deal with a ‘charity’ called ‘Invest In Africa’. However all is not as it first appeared; it transpires that 'Invest in Africa' is actually a ‘not for profit’ organisation with only one employee, accused of being a ‘PR front’ for a contentious oil extraction company.
Football clubs don’t usually have paid deals with charities or 'not for profit organisations'. Blackburn shirts displayed "Prince's Trust" last season but the club donated the space for free. Barcelona’s famous shirts display ‘Qatar Foundation’ but they receive E150m as part of a sweetener deal for helping to arrange the Qatar World cup. Sunderland’s unusual deal raised a number of questions and set some bells ringing: how could a legitimate charity reasonably believe that spending this amount of money on a mid-table premiership team was a good use of their funds? Wouldn’t they be better spent using their money to do some actual good deeds? Who are ‘Invest in Africa’ and do they have the funds to fulfil the contract with Sunderland?
It transpires that ‘Invest In Africa’ was set up by Tallow Oil and Gas CEO Aiden Heavey. Tallow are a financially successful oil exploration/extraction company specialising in West Africa, making $829m profit in the first six months of 2012. ‘Invest in Africa’ has been set up with the published aim of ‘building a partnership of companies operating successfully on the continent to inspire other businesses to follow their lead’. However the only company currently involved in the ‘partnership’ is Tallow. ‘Invest in Africa’ (with only employee, Director Will Pollen) has also been described as a PR ‘front’ for Tallow by oil pressure group ‘Platform’. Platform are critical of Tallow for their non-transparency (alleging that the lucrative but somewhat secretive contracts agreed with West African politicians favour Tallow and a few local individuals rather than most of the West African countries' population). Tallow were also criticised for imposing a 500km fishing exclusion zone around their rigs - with inevitable results for local fishing communities. For more information see the Platform site.
The sponsorship deal could provide revenue for Sunderland of up to £20m a season - a huge leap from the £1m they received under their previous deal with Tombolo. Given the need to move towards Break-Even, there are probably few businesses that would have turned their back on a similar deal with companies like Tallow. But when fans proudly sport the replica shirt with the ‘Invest in Africa’ logo, they shouldn’t be fooled into thinking that they are actually helping to make a difference in Africa.
Premier League Chief Executive Richard Scudamore has announced the that Premier League is looking into the prospect of introducing its own Financial Fair Play rules. Appearing before the Commons Select Committee on Tuesday 10 July, Scudamore advised that they are setting up a Working Group and aiming to have proposals before clubs during February/March 2013.
With the Football League having introduced their own FFP rules, the Premier League has been criticised for growing levels of debt and for the lack of Premier League-specific FFP controls. UEFA's FFP rules apply to all clubs that choose to apply to take part in UEFA competitions. Consequently, a
club that does not wish to apply for a UEFA Licence may choose not to comply with the rules. Scudamore disclosed on Tuesday that only 19 of the 20 PL clubs had applied for a UEFA license. The non-applicant club is not in the public domain (although I suspect the non-applicant may have been Blackburn, owing to sign-off issues with their accounts).
Owners of clubs well adrift of the lucrative Champions League slots have several reasons for potentially choosing not to comply with the UEFA FFP rules (even at the expense of a UEFA competition ban). The revenue received for taking part in the Europa Cup is generally around £5m-£7m, compared to the new TV deal which will pay around £60m+ to clubs near the bottom of the division. Ambitious clubs with wealthy owners currently outside the top 6-8 clubs (such as QPR) may therefore feel the restrictions imposed by the UEFA rules outweigh the potential benefits, and could choose not to comply. UEFA's FFP rules also require the owner to inject equity into the club to cover losses over E5m, up to the maximum Break-even deficit (E45m for the current Monitoring Period), - owners without the available funds may also decide not to apply for a UEFA licence.
Scudamore's appearance before the Committee is available in full in the link below. The more interesting disclosures start at around 33mins in, with the FFP announcement at 51mins (or 11.20). Note: the video doesn't appear to work on mobile devices.
Any club or individual that feels aggrieved by a punishment applied by a League or footballing body is able to apply to take their case to the Court of Arbitration in Sport. Subject to certain criteria, CAS may to able to arbitrate on the case. Recently two Turkish teams have been punished by UEFA for breaches of FFP rules and have taken their case to CAS. The results have interesting implications for the implementation of FFP. They also show how challenges to FFP punishments may be applied.
Bursapor had ‘overdue payables’ (i.e. tax, or salaries, or transfer fees) dating back to 2007. The UEFA Control and Disciplinary Body imposed a E300k fine and also gave the club a suspended punishment of a one-year UEFA competition ban. Buraspor appealed to UEFA, who reduced the fine to E50k but imposed an immediate UEFA competition ban. Buraspor took the case to CAS who judged that the club was free to compete in UEFA competitions but should be fined E250k.
Besiktas owed millions in overdue tax, salaries and transfer fees and in May 2012 were given a E600k fine and a two-year UEFA ban on the grounds that the club had violated the FFP and Club Licensing regulations. They appealed to UEFA who confirmed the two-year ban but changed the fine to E200k, plus another E400k suspended fine. Besiktas took the case to CAS who upheld the two-year ban but imposed a E100k fine, plus another E100k suspended.
These cases are interesting as they confirm that CAS will make judgments and be willing to uphold UEFA punishments in respect of the current FFP rules (including UEFA competition bans). Although these particular cases relate to ‘overdue payables’, the indications are that other aspects of the FFP regulation (such as overspend) may also be upheld by CAS.
Shortly after arriving at Wembley before the 1975 FA Cup final, FA officials insisted that Fulham black out the manufacturer’s name on their boots (you can see their name-free boots in this clip). Obviously a great deal has changed in 37 years and today there is precious little that isn’t sponsored - even the competition now calls itself ‘the FA Cup sponsored by E.ON’.
One of the consequences of escalating wage-bills has been the rather unseemly scramble for increased commercial revenue - clubs look to exploit every avenue in order to increase income. Newcastle abandoned the name St James Park and now play at the Sports Direct Arena. Liverpool and Chelsea are discussing changing their stadium name in the search for extra revenue. Outside the Premiership, Cardiff recently announced that they have changed the traditional colour of their shirt to suit the demands and commercial aspirations of their new owners – a cosmetically simple change from Bluebirds to Red Dragons. With player wage levels being slow to react to the 'soft salary cap' envisaged under FFP, traditionally important aspects of the club’s history and culture are now considered as options for commercial exploitation.
We would probably be foolish to believe that sponsorship has evolved as far as it can do – there is probably more to come. Perhaps, for a view of the future we should look at Indian Premier League cricket – a competition which makes the FA Premier League look distinctly understated – see clip
But what happens when there is nothing else is there to sell? Could a club sell its name? Could we soon see teams named something like ‘Melchester Big Mac Rovers’? We are probably some way off that at the moment but there are some important precedents. In 2010 Stirling Albion considered a tie-in with Compare the Market.com to rename themselves Stirling Albion Meerkats. This rather cuddly concept was vetoed by the SFA - a spokesman advising; "Given that a name change for commercial purposes would have huge implications, the integrity of the game would be paramount in any decision-making process." (link).
For the wealthy benefactor clubs, team naming rights might offer a solution to the thorny problem of how to balance the club’s books for FFP purposes whilst ensuring the club pay top dollar to secure the finest players. UEFA has established the "Club Financial Control Panel" to oversee the licensing process for their European Competitions. One of their duties is to review any commercial contract from a 'related party' (i.e. connected to the owner) and ensure it is for 'fair value' and not artificially inflated in an effort to help the club meet FFP. As the Panel looks at precedents, it would struggle to apportion a 'fair value' to any brand new kind of sponsorship from a related party. A club operating on a 'benefactor model’, willing to add sponsorship to the club name would, potentially, be able to argue that almost any figure (£50m, £80m, £100m?) represents 'fair value'. It is also possible that any naming rights deal could be front-end loaded so that the income could be timed to meet the club's immediate FFP needs. Although the recently announced Premiership TV deal for 2013-16 makes FFP compliance more attainable, the possibility of a top-flight club selling naming rights hasn’t receded entirely (and a lower deal after 2016 might put the issue back on the agenda).
In England, traditionalists can take some comfort from the fact that FA Council approval is currently required for any change of name from the Premier League down the Isthmian and Northern Premier Leagues. Fortunately any change in ‘playing name’ cannot be done overnight – an application needs to be submitted prior to 1 March for the following season (FA rules, page 97).
Headlines were made recently when a potential take-over of Bury by Rangers was muted. Although the story was swiftly denied, the idea was apparently for Bury to play Football League home games at Ibrox in a blue shirts and, ultimately, change their name back to Rangers. It all sounds rather fanciful until we recall events at Wimbledon – the club moved to Milton Keynes and in 2004, the Football League approved the change in club name to MK Dons.
As the FFP requirements start to bite, clubs will increasingly come under pressure to raise income. We should also consider how the Premier League bosses would react to a proposed change in club name for purely commercial reasons. They are unlikely to be at all keen on the idea of selling team naming rights. However, it would be deeply embarrassing for the Premier League to have one or more of their top clubs excluded from the Champions League because they could not meet the FFP criteria. It remains to be seen, but perhaps Peter Scudamore (the champion of the 39th game), or one of his successors, might view team naming rights as the lesser of two evils.
The FA aren’t as rooted in the past as many would believe and perhaps we shouldn’t rely on them indefinitely to protect our current value structure. We should remember how things have changed since 1975 – it now seems inconceivable that the FA would once have insisted that Fulham stick tape on their boots for the good of the game.
Across Europe there are some notable examples of clubs that have considered changing their playing name for commercial reasons:
Last year, it was announced that La Liga team Getafe had been bought for around E90m by the Royal Emirates Group and would in future be known as Team Dubai. It has since transpired that the REG have more in common with the Portsmouth’s former Arabian owners, than Sheikh Mansour. The funding for the purchase has stalled.
SV Austria Salzburg/Red Bull Salzburg
Red Bull Salzburg took over ownership in 2005 and have since changed the name, moved to a new stadium and changed the strip from purple to the Red Bull can colours (with, unsurprisingly, a bull on their badge). A splinter club has been formed under the old name and plays in the third tier of Austrian football.
PSV stands for Philips Sport Vereniging (Philips Sport Union) and for a couple of seasons tried to rebrand themselves as Philips SV. This change wasn’t very effective and was unpopular with the fans and the club has stopped pushing the Philips name.
Llansantffraid/Total Network Solutions/The New Saints
After winning the Welsh Cup in 1996 and qualifying for the Cup Winners Cup, Llansantffraid FC (nicknamed ‘The Saints’) accepted £250,000 from an IT company and became Total Network Solutions Llansantffraid FC. The ‘Llansantffraid’ was soon dropped and the club was generally referred to as ‘TNS’ by fans. In 2006, British Telecom took over the IT company and the sponsorship ended. After trying to sell their naming rights on ebay, the club settled on the name “The New Saints FC”.
This article is also published on www.reclaimthegame.co.uk
New Premier League TV deal to resolve FFP worries 19 June 2012
It isn't often that sporting journalists are genuinely shocked, but the new Premier League TV rights auction surprised many. The rights to broadcast the Premier League matches from 2013 to 2016 within the UK were up-for-grabs and had been expected to be sold for a similar sum to last time. Owing to the aggressive bidding from BT and the desire by Sky to hold onto most of the matches, the bidding closed at £3.018bn (a huge increase of £1.2bn from the last auction). For an excellent in-depth piece on the new deal, read this piece from www.sportingintelligence.com .
The increase is so large (around 70%), that the FFP test covering years 2013/14, 2014/15 and 2015/16 should be significantly eased for all Premier League clubs. However, this assumes the clubs spend the proceeds wisely and that the new funds don't trigger a new period of wage-escalation. Alan Sugar (Spurs Chairman at the time of the first Sky deal in 1992) talked of the 'prune juice effect' in football - whatever funds come in at the top are allowed to run out at the bottom (mainly on player wages). Despite clubs sharing over £1.1bn last season in TV revenue, most clubs fail to break-even. The new deal is more than 10-times the size of the 1992 deal - during this time player salaries have increased from an average £117k a year to a current average of over £2m a year (a 17-fold increase).
Analysts at Citi estimate that BT will need at least 2.5m subscribers to break-even - whether they can achieve this high figure remains to be seen. Clubs need to be mindful of the possibility that the next auction may not be as competitive and that revenue may decrease after 2015/16. With the current potential for wage escalation and with club tying players into 4 and 5 year contracts, it is important that clubs don't over-rely on the new deal's level of income.
One other area of risk will be at the middle to bottom end of the Premier League. There is no escaping the fact that three clubs will be dumped off the gravy-train each season. Losing a guaranteed income of over £60m a season would be a disaster for a club that had written player contracts assuming this level of income (even allowing for parachute payments).
Regarding FFP, it is important to remember that the increased revenue commences in 2013/14 - i.e. after the first two-year FFP Monitoring Period. Clubs will need to ensure that the promise of the new revenue does not get in the way of their need to meet the first Monitoring Period target.
However with up-to £120m available for the top Premier Clubs, perhaps the prospect of an additional £30m in Champions League revenue (or £6m for the Europa League) could potentially become less financially relevant.
It has been a fairly eventful couple of weeks at Liverpool and a number of pundits have expressed their surprise at how a manager that has reached two cup finals could be sacked. To understand the situation, a good place to start is with the club accounts.
I have produced a financial projection for the season that has just finished (2011/12) and also next season (2012/13).
My projection looks like this:
To understand what these figures mean and read the article click here
Following the dramatic events at the Etihad, I have received lots of interest from people asking the same question: “Will City pass the Financial Fair Play test?” To answer this question you need to make a large number of assumptions about the club’s footballing and financial performance. The assumptions that I have used are outlined in the Notes section but in summary they include the following main assumptions:
- City continue their success and win the Premier League, FA Cup and reach the Champions League final next year
- City continue their extraordinary 25% year-on-year growth in Commercial income (topping £100m in 2012/13)
- City make no major sales or purchases next season (this prediction is probably unlikely but it provides a base to work from).
As with all projections, there are huge number of variables and each one is open to challenge. However the club accountants will also be wresting with many of the same predictions regarding, League position, Champions League performance, and even the Euro exchange rate.
My projection has City failing the FFP test for the first Monitoring Period by £63.5m. See also the technical note below under heading Annex X1 regarding this figure.
I have used a mixture of known information and 'best case' assumptions for the projection. If I had assumed a less successful season where City only reached the last 16 of the Champions League, did not win the FA Cup, City would be £32m worse off and would fail the FFP test by £95.5m.
Readers can post comments at the end of the pages - please post comments at the end of part one.
UEFA Financial Fair Play rules explained in 6 minutes
I have uploaded a new video that explains the UEFA FFP rules in just 6 minutes.
Now that all clubs have finally published their accounts for last season (Liverpool being the laggards), UK newspapers are starting to produce their analysis of the finances of the Premier League clubs.
Matt Scott in the Telegraph produced an in-depth analysis of club accounts, including net transfer spending (something that isn't easily identifiable). It is highly recommended.
James Lawton in the Independent wrote a very interesting article about the lack of governance in the Premier League and also published a table of club debt, which I have re-ordered and shown below.
|Premier League debt|
There are a few interesting things to notice. For all the jibes directed towards Man City, it is important to recognise that the owner doesn't load debt onto the club (the £41m shown above appears at the end of the accounting period and the owner will pay-off any underlying debt by buying equity in the club). Wealthy benefactors such as Abramovic, Ashley (Newcastle) and Al-Fayed (Fulham) have still not yet converted the club debt to equity (a pattern generally repeated at other benefactor clubs).
UEFA's Financial Fair Play rules spell out how much a club is a able to lose and still comply with the FFP financial requirements. The figures are all documented in Euros. Clubs struggling to comply with the rules will have noticed that the falling Euro is making the task much more difficult.
The chart above shows how much the Euro has fallen since its July 2011 peak. The first and second Monitoring Period limits have fallen by almost £4.5m..
It remains to be seen whether UEFA will be lenient with English clubs who miss the targets because of exchange rate fluctuations. Premier League clubs could argue that the goalposts have moved since they signed up to the rules.
UEFA might point out that any Premier League clubs buying players from the Eurozone will benefit from lower transfer fees as a result of the Euro's exchange rate slide. There could however be a considerable benefit for any club that has agreed a number of player contracts that are denominated in Euros.
Although this site takes a generally positive view towards UEFA's Financial Fair Play rules, it is important to appreciate that the changes carry some risks for the Premier League.
Many journalists, fans and people working in football are concerned that UEFA's Financial Fair Play rules will reduce the excitement of the Premier League and that the larger clubs will dominate the domestic competitions. Martin Samuel from The Mail is one of the more outspoken critics of the rules, but he is certainly not alone in his concern about the effects of FFP. In future, wealthy owner will not be allowed to spend their own money in the pursuit of success - even if an owner is prepared to put funds into the club via equity (as Sheikh Mansour does at City), they will simply not be allowed spend to achieve their ambitions for the club. Many would agree that City and Chelsea have added welcome excitement and variety to the Premier League - both clubs are funded by wealthy owners. And it is not just the uber-wealthy clubs that will be impacted by the rules - in future clubs will not be able to 'speculate to accumulate' and won't be able to spend much more than they receive to 'chase the dream'. Swansea and Norwich have both made fairly big financial losses in recent years - other clubs will not be able to follow the same approach. The main worry is probably that the rich clubs will get richer and that the smaller clubs will not be able to break into the top tier - they will lose their top players to the bigger clubs and consequently the Premier League will become stupefying dull, consistently dominated by a small number of very wealthy clubs that continue to vacuum up the commercial benefits of their success.
This view of the football is certainly both powerful and worrying. However it could be argued that the post-FFP world is already with is - we can see how FFP will affect the Premier League simply by looking at the Bundesliga.
The Bundesliga already operates in a Financial Fair Play environment. The majority of German clubs break-even and there is political pressure used by the Bundesliga to discourage overspending. Other than Wolfsburg and Levekeusen the clubs operate on a model whereby the fans own 51% of each Bundeliga club. Consequently, there is no scope for wealthy owners to inject huge funds into buy success - the wealthy benefactor model doesn't operate in Germany. The Bundesliga is dominated by Bayern Munich, who occupy a similar historic position as Manchester United. As in the Premier League, the large clubs usually take part in the Champions League most seasons and enjoy the benefits of the Champions League money. So, if the nightmare scenario of the post FFP future is correct, we would expect the Bundesliga to be significantly more dull and predictable compared to the Premier League. However, the German reality is actually somewhat different.
The attached graphs show how the top 10 clubs in 2002 have fared in the succeeding years 10 years.
Note: the 2011/12 positions are as at today's date and could well change a little by the end of the season. To keep the scale comparable, relegated clubs are shown bumping along the bottom of the graph, rather than in their actual league position.
The more 'chaos' and 'noise' in the graphs, the more variety in League position. There is clearly greater variety in clubs' league position in Germany. The position at the top of the chart is also noticeably more unsettled in Germany. Obviously Bayern dominate the Bundesliga, but, to a somewhat lesser extent than Manchester United. There also hasn't been the same dominance of 4 or 5 big clubs in Germany as there have been in Premier League. In terms of variety, the Premier League is actually rather dull by comparison (even allowing for the performances of Newcastle (£140m in debt to Mike Ashley) and Manchester City.
Note, German points are adjusted for the 4 fewer games in the Bundesliga.
Looking at the League positions of the FA Cup winners and the German cup (the DFB-Pokal), we see that the German cup again provides more variety than in England (especially amongst the winners). Whereas only one club outside the top 4 has won the FA Cup in England (debt-fuelled Pompey), 3 clubs have achieved this result in Germany. The runners-up have achieved broadly similar league positions in both Leagues.
Although this presents a more comforting view of the future, there is one notable differences between the two national leagues; debt. When FFP is fully up and running in the Premier League, a large number of teams will have significant historic debt issues to contend with - this simply isn't the case in Germany. There is a risk that the cost of servicing debt may restrict clubs ability to compete and generate even less variety of league position we currently have in the Premier League.
The Bundesliga publishes an excellent English language annual review on the financial position and it makes interesting reading. Unfortunately, the Premier League does not produce a comparable report. Glenn Moore also recently wrote an interesting piece on German football.
The newly announced Championship and League 1 & 2 Financial Fair Play rules rely on the use of a 'transfer embargo' as the main sanction for overspending clubs in the Football League. The first transfer bans for League 1 and 2 clubs under the new rules will commence from the start of next season (2012/13). However the Football League have confirmed that fans may be kept in the dark about any transfer ban imposed on their team.
When contacted, the Football League explained that they have a 'longstanding policy not to comment publicly about the imposition of
embargoes and that it would be up to the club's discretion whether they wish to make an embargo public'. Unfortunately, League clubs have not always been good at informing their supporters - Portsmouth fans found out about their January transfer embargo through informal channels, some time after the ban was imposed. There is a real risk that fans may be left in the dark as clubs seek to hide an embarrassing ban from their supporters. By leavint it up to the discretion of the clubs, the League appear to have missed an opportunity to ensure greater transparency and communication with fans.
Championship clubs have voted 21-3 in favour of introducing strict new Financial Fair play rules. Clubs that overspend will be punished with a Transfer embargo. The details are attached here.
Plans to introduce a model that restricted clubs to spending a percentage of their turnover have been abandoned in favour of 'breakeven' model that restricts the level of losses a club can make. In the face of practical and legal challenges (outlined in my previous article), the first sanctions will not now be in place until 1 January 2015, in the form of transfer embargoes.
The rules introduce the new 'Fair Play Tax', whereby clubs that overspend will have to pay 'Tax' that will then be shared out amongst the clubs that comply with the rules and remain in the Championship. The introduction of this tax is dependent approval from the Premier League - gaining their approval is likely to be very difficult. Reading, Southampton (and Leicester) voted against the proposals - this suggests that PL clubs may well not vote in favour of the Fair Play Tax. However, this uncertainty only leaves the Fair Play Tax in doubt - all the other rules have been agreed.
Any club relegated from the Premier League will be exempt from the rules for one year - it will then have to comply fully or face a transfer embargo. It is probably this rule that will worry Premier League clubs the most as it makes it more risky for a club to spend heavily in an attempt to 'bounce-back' immediately. There are a number of exclusions in the new rules, but Premier League clubs will have noticed that the cost of servicing existing debt is not amongst them. Some clubs, such as Aston Villa and Bolton, routinely pay around £5m a season to pay interest on their debt; the new rules will make life in the Championship particularly uncomfortable if the can't escape in the first year after relegation.
Interestingly, any promotion bonuses are exempt from the FFP calculations - we may see clubs structure their wages so that promotion bonuses make up a larger percentage of total pay.
League 1 and 2 clubs have agreed to continue the Salary Cost Management Protocol (SCMP) and impose transfer embargos on overspending clubs from the start of next season (2012/13).
Under the SCMP, clubs needing to restrict spending on wages to a percentage of their turnover (55% in League 2, and 65% in League 1 reducing to 60% in 2013/14). Clubs are required to submit regular up-to-date budgetary statements and forecasts throughout the season. The League will impose a transfer embargo as soon as a club is about to exceed the limits.
The fall-out from Rangers financial collapse continues. Scottish Premier League (SPL) clubs will vote on new rules at the end of April that would be applied if a club enters Administration or if it suffers liquidation and is replaced by a new club (or "newco").
In future, any club entering administration would be docked 15 points (or 1/3 of their points at the time of the insolvency event, if that is a greater number of points).
Significantly, any "newco" would also be docked 10 points from the start of the next two seasons and would lose 75% of their SPL payments for the next three seasons.
On top of this, there is the UEFA impact. UEFA require a club be a going concern, submitting accounts for three seasons before they are given a license to compete. Although Rangers have lobbied UEFA on this issue, it appears that a "newco" would effectively also suffer a three year UEFA ban.
Clubs would also be liable for any fine and/or transfer embargo imposed by SFA - Rangers have been hit by a fine for financial transgressions and had a 12 months transfer embargo imposed.
There has been a great deal of interest recently in whether Manchester City will pass UEFA's FFP test for the first Monitoring Period. The debate merits an explanation of how the FFP rules will apply to City and the implications for the club.
The first UEFA Monitoring Period covers the two seasons either side of the 2012 Summer Olympics (the 2011/2 and 2012/13 season. Clubs have to report losses below E45m (or £38m) over this two year period (i.e. an average loss of no more than £19m a season). UEFA has 8 available punishments for a club that doesn't pass the FFP test and any punishment would commence from the 2014/15 season. Although City lost £196m during the 2010/11 season, we won't know the scale of the loss for the 2011/12 season (i.e. the first season included in the Monitoring Period) until they release their accounts in November 2012.
At first glance, reducing season losses from £196m to £19m might look like an unachievable task for City. However I should direct readers to the excellent Swiss Ramble blog where he posts a detailed break-down of how City could possibly bring the losses down to just -£14m for the 2011/12 season. For the 'Swiss Ramble' scenario to work, everything would have to have run in City's favour (including £10m transfer fees that don’t seem to have been achieved this season). Although it would be a brave (or potentially foolish) person to argue with Swiss Ramble’s figures, for the 2011/12 season there is rather gaping hole for City in respect of the 2012/13 figures (the second year of the first Monitoring Period).
As Swiss Ramble points out, for the 2011/12 season, the FFP Break Even rules allow clubs to exclude wages for players signed before 1 June 2010. For City this equates to around £53m and is a key factor in the club reducing their debt close to UEFA’s permitted level. N.B. UEFA’s wage exclusion is so crucial to this debate that I have attached the relevant text from the rules at the foot of the page.
However, this wage exemption only applies for one season only (2011/12). When calculating the deficit figure for the 2012/13 season, all wages must be included, irrespective of when the player was signed. City therefore have to include the £52m wage cost in 2012/13 and, all things being equal, this would push the projected loss up to around £67m for that season (or roughly double the permitted Break Even Deficit for the two combined seasons of the Monitoring period).
It therefore seems almost certain that City cannot meet the FFP requirements for the initial Monitoring Period.
But “what about the record-breaking Etihad deal?” I hear you cry. The £40m a year from Etihad will certainly help the club and, in time, could generate significant commercial income. However the receipts from Etihad have been included in Swiss Ramble’s projection and are unlikely to generate material additional income during the first Monitoring Period.
So, with City seemingly set to fail the Financial Fair Play test, we need to consider how UEFA will react. For most people, the key question is whether UEFA will ban City from UEFA competitions. Of course, no-one really knows which of their 8 available sanctions UEFA will impose. There are many contributing arguments on either side of the debate - there are factors influencing UEFA to act leniently but also many factors pushing them towards the harshest of punishments. Rather than speculate, I have outlined the main arguments and rationale for both positions:
UEFA will be lenient because:
- City have fairly modest debts (£43m) and debt is the most important issue in European football.
- Banning a top English Club (potentially the English Champion) would devalue the UEFA competitions.
- There are a number of clubs who look likely to fail the test - if too many are banned, the competition is devalued
- Platini is likely to find life uncomfortable if a number of the top European clubs are banned - City may have safety in numbers and gain new allies with other clubs struggling to comply.
- City's losses are trending in the right direction - UEFA will consider this as a mitigating factor.
- UEFA are keen to phase-in the FFP rules so may be more lenient in the early Monitoring Periods
- UEFA are required apply penalties in a fair and consistent way – it might be hard to exclude one non-compliant club whilst imposing a lesser punishment on another club that fails the test.
- By Excluding a club, the punishment becomes self-fulfilling – a club that doesn’t receive the £25m-£50m of Champions League money is much more likely to fail subsequent Monitoring Periods.
UEFA will react harshly because:
- There is a genuine concern in UEFA over the high levels debt and the amount of losses clubs are making.Platini has staked his reputation on FFP and has too much to lose by backing down.
- Platini and general secretary Gianni Infantino seem to be giving progressively more stern pronouncements on FFP. Recent statements included " There'll be no backtracking"," and "We (at UEFA) probably won't be popular but we have to do it, otherwise football will be destroyed"
- FFP is supported by most UEFA members.
- FFP is now an embedded part of the UEFA DNA.
- Platini will probably fail to win the FIFA Presidency in 2015, if he abandons FFP as he needs European support
- City look set to miss the Break Even Deficit figure by a significant margin.
- City have not had much success in Europe and a ban would probably not have a huge impact on the competition's credibility.
- City (and Chelsea) are not popular in Europe amongst other clubs.
- The German clubs cannot make losses and are very much oppose to the wealthy benefactor model and City in particular.
- The European Club Association (effectively the Trade Association for the top clubs) is headed by Rummenigge (one of the most outspoken opponents of City who even called for the club to be banned).
- The European Commission (EC) approved the FFP rules (and even said they felt they were a good thing). Any club wishing to challenge the legality of FFP will need to go to the EC.
- This year UEFA has significantly bolstered its legal department to ensure it can beat any legal challenge.
- City are likely to be one of the more serious FFP transgressors, probably standing out from other clubs that fail the test.
- Excluding City would present a fairly easy way for Platini to appear tough and serious on this issue.
- UEFA is required to apply penalties in a fair and consistent way - Exclusion is a penalty that may well meet this criteria
- England's relationship with world football is far from ideal.
UEFA FFP Wage Exclusion paragraph: Annex XI (page 85)
The full UEFA FFP rules have been criticised as being overly-long and difficult to understand. To overcome this, UEFA have issued a summary guide which they distributed as part of a press pack. It is recommended reading for anyone wanting to gain a better understanding of Financial Fair play. I have attached a link and have also put this on the FFP Explained page.
FFP Press Kit EN_FINAL_en _1_.pdf
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Type : pdf
Football League proposals for the introduction of Financial Fair Play rules appear to have run into difficulty and a delay in implementing the rules looks increasingly likely.
In June 2011, the Football League (FL) announced that Financial Fair Play rules would be introduced into the Championship from the 2012/2013 season. The FL set out a schedule that would have seen the proposals circulated and then ratified at their Quarterly Meeting of all 72 clubs in February. However, the February date has been missed and clearly things haven't gone according to plan. When contacted, the Football League advised that the FFP proposals "are still being looked-into". As the rules will need to be circulated, ratified and put in place by the end of July 2012, all the indications are that the implementation will now slip by at least a year.
The Football League faces a number of obstacles and even legal challenges in order to implement the new rules to curb spending.
The initial proposal was for Championship clubs to restrict their spending on wages to 60% of the turnover. Conceptually, this sounds fairly straight-forward. However the devil is in the detail and some clubs are clearly not happy with the proposals - West Ham let it be known that they were considering a legal challenge as they felt the rules were unfair and would restrict a clubs ability to compete in the Premiership. Perhaps, somewhat missing the point of the FFP rules, it was also reported that West Ham also apparently "fear that transfer fees will fall in the Championship and League 1 and that ambitious clubs will be penalised".
The consultation process faces a number of challenges - one of them has been identifying who to actually consult. Owing to relegation and promotion, turnover in the Championship is high (25% of teams leave the Championship each season), making it difficult to effectively consult. Potentially, the top half of League 1 and the bottom half of the Premiership should be involved in the consultation process. However this would dilute the input from the existing Championship clubs and, somewhat uncomfortably, allow clubs not in the Championship to have input to the rules of the division.
And then there is the thorny problem of how to punish clubs that break the rules - the initial proposal was for errant clubs to face a transfer ban as a first sanction, with possible points deductions for major offenders. As I outlined in the 4 April article, it will be difficult to impose fair and consistent sanctions when financial targets that can be missed by one pound or tens of millions of pounds.
However as club accounts are produced retrospectively (i.e. they always relate to the previous season), there are difficulties in using historic figures as a deterrent. In addition, any club living under a transfer ban for previous high wage-spend in the previous year might find itself shackled to their high-wage-earning players and unable to bring in cheaper replacements. As an example of how complicated this issue is, it is worth looking at high-flying Championship club Southampton. They recently announced their results for last season (i.e. when in League 1). They ran a wage-bill of 93% of turnover and lost £11.5m. However, this season they have increased their TV and Commercial income, sold Oxlade-Chamberlain and will probably come fairly close to Break-Even. Southampton also appear to be heading for the Premiership, where seemingly no punishment could be applied. It would therefore be extremely hard to implement an appropriate and timely punishment system for a club like Southampton based on a rigid formula that could also applied fairly to Championship clubs and clubs relegated from the Premier League. The issue of how to handle clubs relegated from the Premier League highlights other problems, as Sports Lawyer, Daniel Geey explains, " it would be a very brave regulator to sanction clubs for breaching the FFP regulations for accounting periods when they were outside of the Championship".
There is also concern that the timescale for implementation has been too ambitious. Clubs in the Premier League were aware in 2009 that FFP rules were coming (the final rules being issued in 2010). There is an appreciation that Championship clubs may need a similar time to adjust to the new financial restrictions (especially given the potential complexity of the rules).
It is important to remember that strictly speaking, no FFP rules currently apply, as such, in the Premier League. UEFA's FFP rules only apply to any club wishing to apply for a license to compete in UEFA competitions. Clubs are therefore not obliged to comply. Indeed it is entirely possible that the owners of some clubs will baulk at the rules requiring them to inject equity to cover club losses and may choose to rule themselves out of UEFA competitions. The UEFA competitions are very much the 'icing on the cake' for Premier League clubs -the situation is entirely different for Championship clubs who face potentially complicated restrictions that will apply to their 'bread and butter' activity.
All this makes it difficult to envisage how the Football League can easily take FFP forward in the Championship. A more straight-forward approach may be called for, perhaps one that simply requires owners to convert losses to equity (or face a points deduction). This approach would not be an entirely satisfactory solution as it would not address the issues around the wealthy-benefactor model and 'financial doping'. However, this alternative would at least impact on general spending levels and recent events suggest that increasing debt, rather than an excess of owner funds is the more pressing issue outside the top flight.
Update: This article was used (with full permission) as the source for an article in the Independent on 5 April
At the UEFA conference in Istanbul, UEFA ratified three more disciplinary measures for clubs that breach FFP rules. As I outlined in my article on 7 Feb, five measures had previously been agreed at the Nyon Conference in January. The full menu of punishments now reads:
- Reprimand / Warning
- Deduction of Points
- Withholding of Revenue from UEFA competition
- Prohibition to register new players for UEFA competitions;
- A restriction on the number of players that a club may register for UEFA competitions
- Disqualification from a competition in progress
- Exclusion from future competitions
At the Soccerex conference in Manchester, one of football's foremost Administrators, Trever Birch (with Leeds and Portsmouth on his CV), outlined how "the Championship is a scene of carnage with clubs pursuing the Holy Grail of promotion, losing between £5 million £10m a year and a third of them spending over 100 per cent of turnover on wages." Birch had previously explained that the problems at Portsmouth had resulted from the club aiming to gain a 'competitive advantage' by paying high wages. I thought the attached graph from Cass Business School is relevant here and it shows how Premier League and Championship clubs' wage spend corresponds to league position:
As we would expect, the figures show that, in general terms, the higher the wages, the higher the likely league position. Once a club reduces its wage bill then it is less likely to achieve league success. Interestingly, most 'outliers' are scattered significantly below the line and mainly amongst the clubs that spend less than the average. These represent the clubs who spend below the average on wages and who suffer relegation-level failure on the pitch. This is interesting if we consider Birch's comments; any club that doesn't keep up with the average spend of their competitors becomes more likely to suffer catastrophic under-performance. This helps to explain the wage-escalation in the Championship and the Premier League; the risk of relegation is greatly reduced once a club pushes their wage-spend above average levels. The problem with this scenario is that drives up the general level of wages - each year clubs need to spend more just to keep up with the average.
Last week was an truly excellent week for Platini and saw him secure approval from the European Commission to the Financial Fair Play rules. Platini has been concerned that any excluded club may challenge the legality of the punishment (hence he recently bolstered his legal dept) (see article from 16 March). Approval from the European Commission was essential for Platini as he has now closed the door on any legal challenge. He must have been delighted to see that they didn't just confirm the legality of the FFP regulations but went a step further and said that they supported the rules; "I believe it is essential for football clubs to have a solid financial foundation" said Joaquin Almunia, vice-president of the EC. As the attached article explains, any club wishing to complain about their FFP punishment has to take their grievance to ..... the European Commission.
Platini would have been aware of Commission's intention to approve the FFP rules when he gave his interview to AFP a few days earlier. The statements from Platini are probably the toughest and most forthright pronouncements on his personal project:
" There'll be no backtracking",
"We (at UEFA) probably won't be popular but we have to do it, otherwise football will be destroyed",
Platini said he was prepared to be in the firing line if clubs that transgress were banned from European competition but he said the rules were "important for the legitimacy and popularity" of the game
Analysis by www.financialfairplay.co.uk reveals the increased ticket price that clubs would need to charge if they were to manage on a 'break-even' basis and if the ticket prices were increased to account for the shortfall. The study of Premier League finances reveals that fans receive match-day ticket subsidies averaging at £25 per ticket. Although Man City's place at the top of the subsidy table will surprise few, the level of loss per ticket sold (£161) is somewhat shocking. Perhaps more surprising are the unsustainable subsidies provided to Aston Villa and Bolton fans (£63 and £49 respectively).
The analysis is based on Profit Before Tax for Premiership clubs over the past 3 seasons - any loss is apportioned to the number of tickets sold over that period (based on home attendances over the period). Few clubs have consistently made a profit during the last three years. Arsenal stand out as a profit-making club, but we need to remember that these figures represent profit before tax; after tax and amortisation of player contracts, the club barely broke even in the 2010/11 season (making £2.2m profit).
|Team||Profit /Loss (£m) 2008/9||Profit /Loss (£m) 2009/10||Profit /Loss (£m) 2010/11||Total Profit/ Loss (£m)||Average Profit/ Loss (£m)||Average Attendance||Profit/Loss per home game||Profit/Loss per ticket sold||Profit/Loss per season ticket|
|*2010/11 figures not available - Average loss calculated over two seasons|
|Profit/Loss figures shown are Profit Before Tax (or on a consistent basis)|
At current levels of club expenditure, the ticket price-rise required by most clubs to reach break-even would obviously be unrealistic - current Premier League tickets are amongst the most expensive in Europe and fans are generally oppose to further real-term price increases.
Clubs are searching for a competitive advantage through their overspend; they seek the riches of the Champions League and fight to avoid the financial wasteland of relegation. Football fans are also fairly quick to encourage club owners to increase spending. Antonov (the disgraced former owner of Portsmouth) pointed to the pressure from fans as key reason for the club's overspend - he explained that ‘it was "simply impossible" for Portsmouth to stay within its means and "satisfy supporters' expectations. Even at Arsenal, Wenger has frequently been urged to 'spend some money' (despite the club's recent profits being fairly modest). However, it is clearly the responsibility of the club management to ensure they resist excessive expenditure and run their clubs in a prudent manner.
It is important to consider the source of the funds for the 'ticket-subsidy'. At Man City, Sheikh Mansour routinely injects cash to convert losses into equity - consequently the club has debts of £43m. At Aston Villa, Randy Lerner has similarly converted £133m into shares - however the club also has long-term debts of around £130m owed to Lerner's family trust and has to service £6m in interest payments annually (the equivalent of around 12,000 Season Tickets). Relegation-threatened Bolton Wanders probably look even more precarious - they are £110m in debt, financed by £100m owed to Eddie Davies plus an overdraft facility with Barclays. The club paid over £5m in interest payments last season (equating to around 10,000 Season tickets).
Ticket sales & Match Day Income) represents just one of the three main income streams for the club (the other two being Media/TV and Commercial income). Of the three, Media/TV income is the most important to all Premier League clubs - again using Aston Villa as an example, the breakdown of these income stream elements in 2010/11 was, £21m Match Day, £54m Media/TV, £17m Commercial income. It could therefore be argued that rather than a loss-making club effectively subsidising fans' Match Day tickets, it is, in part, the TV audiences who are benefiting from being able to watch a dazzling array of highly paid talent, whilst paying significantly below the market rate. As a counter-argument, it should be remembered that Sky are very astute and regularly test the market to ensure their packages are priced to maximise income without increasing cancellations. TV Football subscriptions are currently fairly expensive in the UK compared to other leagues - for example Sky Deutschland offers a package showing every single Bundesliga game live, plus premium movies, for around £28pm (i.e. a lower price than the UK equivalent).
If revenues cannot easily be increased, the clubs will need to address the thorny problem of excessive player wages. Currently, if a club doesn't play-ball and spend heavily on wages, it will find it hard to compete with those that do - it is probably no coincidence that the Wolves, the only 'mid-size' club currently breaking even, are facing relegation.
Under the FFP rules, the owners of a loss making club are required to convert any annual losses in excess of E5m into equity. This should add some stability to club finances and ensure clubs aren't saddled with growing debt levels. For some time, there has been an expectation that FFP will influence market forces to help drive down player wages and restore club finances to something approaching sanity. However, like a journeyman centre-half, the situation has been slow to turn. As a consequence of the Bosman rule, clubs will often lock their top players into 4 and 5 year contracts - this makes it very difficult for clubs to introduce lower wage contracts into their squad. The other issue delaying the reduction of player wages is the operation of the free market. With the likes of Man City, Chelsea and even new boys QPR injecting cash into football via wealthy owners, it is hard for clubs to retain and acquire players without paying premium prices (as demonstrated when Arsenal lost Nasri to high wage-paying Man City).
Although Premier League clubs have changed behaviour as a result of FFP (activity in the January Transfer Window was 70% down on the previous year), clubs generally haven't made the changes quickly or deep enough. The 'sugar daddy' clubs continue to record huge losses, and the rest keep spending to try to keep up. UEFA has tried to phase-in the changes so that clubs slowly adapt to the new environment. However, irrespective of the new rules and Platini's frequent pronouncements, there is still a persistent view that UEFA will not follow-through with their ultimate sanction of 'exclusion' and that clubs will instead receive the proverbial smack on the wrist. There remains a real risk that UEFA will ultimately be forced to exclude teams 'pour encourager les autres'. If this happens and clubs suddenly take UEFA's stance seriously, the results could be disastrous; transfer fees would fall through the floor (leaving many clubs unable to clear existing debt); and clubs would find themselves locked-into unaffordable long-term player-contracts.
Last week, questions were asked in the Spanish parliament about the amount of tax that was owed by Spanish clubs to the government. The government was forced to admit that it was owed €752m in back taxes (including €48m owed by Barcelona and €155m owed by Atletico Madrid). The issue was quickly compounded by the Sports Minister Miguel Cardenel brazenly announcing that they were looking at ways that debt could be written-off. The reaction from German clubs was fairly stinging: Bild's sports page on Tuesday ran with the headline "Will German taxpayers eventually have to fork out for Messi and Ronaldo?"
There is an interesting Financial Fair Play element to this issue. FFP rules state that a club will fail the FFP test if it is not up-to-date with its tax
payments (Article 50) - see attached extracts below. FFP rules dictate that the Spanish clubs have until 31 March to agree terms in writing with the Spanish tax authorities (if they haven't already done so). This probably won't be an obstacle given the comments from the Sports Minister, but given the recent German focus, it will make any future decision to waive the tax liability much more difficult.
1 The licence applicant must prove that as at 31 March preceding the licence season it has no overdue payables (as defined in Annex VIII) towards its employees or social and tax authorities as a result of contractual and legal obligations towards its employees that arose prior to the previous 31
ANNEX VIII: Notion of ‘overdue payables’
2. Payables are not considered as overdue, within the meaning of these regulations, if the licence applicant/licensee (i.e. debtor club) is able
to prove by31 March... that:
b) it has concluded an agreement which has been accepted in writing by the creditor to extend the deadline for payment beyond the applicable deadline
David Conn of the Guardian is one of the most informed journalists regarding FFP. He has contributed to a particularly interesting article produced by CNN. He outlines that UEFA are "readying themselves for legal challenges from top clubs and sending out a clear message they will be able to counter them," Conn points to the strengthening of the UEFA licensing and legal team with the appointment of top English lawyer Alasdair Bell."
For more information about Bell's view of FFP, see this article written by Conn:
Dan Storey at football365 has written an excellent article on the German footballing model. He makes some interesting points:
- A minimum of 51% of each club must be owned by the club's members
- Club members have the ability to directly affect the running of the club
- A season ticket for Borussia Dortmund costs £152 for 17 domestic home games and one European game
- Average attendance in the Bundesliga last season was 42,690 (7,000 more than the Premier League)
- Due to the financial regulations imposed, Bundesliga clubs are less prone to signing players for exorbitant transfer fees
With UEFA keen to ensure clubs' expenditure matches their income, we have carried out some high-level analysis of the subsidy levels that fans currently enjoy. Looking at two clubs currently in the media spotlight (Man City and Portsmouth), we have calculated how much extra the average fan would have to fork-out if they were to pay the market rate for their ticket (based on the club operating on a break even basis).
The results are fairly staggering. Man City fans would have to pay an extra £3,053 a season for their season ticket (or £161 per game) if the owner were to ask the fans to make up the current operating loss through increased ticket prices. It is easy to see why fans do not question or challenge the operating model of the club - the entertainment on offer would be considerably reduced if the club were to pay wages based solely on their operating income. At City, the owner has injected equity into the club to cover the ongoing losses. However, this has not been the situation at Pompey, where the club ran up debt of around £180m over their two recent Administration events.
Pompey fans have enjoyed two Cup finals and 7 years in the top flight on gates of around 18,000. However this has come at a considerable cost and over the last 8 years the club has lost around £1m for each home league game. If fans had had to put their hands in their pockets to pay the full rate for the talent on offer, their season tickets would have been around £1,250 more expensive. Clearly fans would not buy tickets at the 'unsubsidised' rate - for those clubs competing with the high-spenders and operating on a break-even basis, Financial Fair Play cannot come soon enough.
|Loss per season||Ave Crowd|
|Average over 3 season||£136,666,667||44,764|
|Home games per season||19|
|Loss per game||£7,192,982|
|Subsidy for each ticket||£161|
|Subsidy for season for 1 supporter||£3,053|
|Loss over 8 years||£180,000,000||18,000|
|Average no. Home games per season||21|
|Loss per game||£1,071,428|
|Subsidy for each ticket||£60|
|Subsidy for season for 1 supporter: £1250|
Under FFP regulations the cost of acquiring a player's contract (i.e. the transfer fee) has to be written off over the life of the contract. However, the same restriction does not apply to other contracts. The cost of acquiring a manager's contract (eg. André Villas-
- Reprimand / Warning
- Deduction of Points
- Withholding of Revenue from UEFA competition
- Prohibition to register new players for UEFA competitions;
- A restriction on the number of players that a club may register for UEFA competitions
- Disqualification from a competition in progress
- Exclusion from future competitions
UEFA Club Licensing Benchmarking January 2011.pdf
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If Michel Platini lies awake at night wondering about the wisdom of pressing ahead with FFP regulations, he might do well to consider events at Portsmouth.
Pompey went in Administration in 2010 having run up debts of around £135m. The club had adopted a wage structure that could only ever be sustained through cash injections from the Gaydamak family. Once the funds dried up, the club found they could not pay the wages and Administration followed.
In a recent interview with Express FM, CEO Lampitt advised that by the time the club came out of Administration, Pompey had managed to get the P&L account to a broadly break-even level. However, when the club was then acquired by Vladimir Antonov (via a holding company called CSI), the club changed it's financial approach. Clearly not mindful of the lessons of the recent past, Lampitt proceeded to use a £10.5m loan (as oppose to equity) from CSI to boost the playing staff. Players such as Huseklepp (£1.5m) and Pearce (500k) were purchased. Within a short period of time, the club had yet again adopted a wage structure that could only be sustained through cash injections form their overseas owner. When Antonov was arrested (for appropriating his Baltic banks’ customer deposits) Pompey found that once again they could not pay the player wages. Lampitt points out that his spending was not at the same level as his pilloried predecessor Peter Storrie and that the Football League had also been taken-in by the Antonov’s ‘proof of funds’ documentation. Although many fans believe he is culpable for their current plight, if the CEO is to be believed, Portsmouth have simply been extraordinarily unlucky.
At the time of writing, Pompey fans fear that the situation is so grave that the club may even by-pass Administration and simply be wound up. The nightmare at Portsmouth illustrates the danger of ‘light-touch’ governance and will surely give Platini some comfort in his plans for a more prescriptive approach to football financing.
A public argument has broken out between Bayern Munich and Man City over the penalties for breaching Financial Fair Play regulations. In an interview with Austrian website www.90minuten.at Bayern CEO Rummenigge makes a stinging attack on City’s spending and expressly calls for UEFA to exclude them from European competion.. Rummenigge explains:
“I recommend that Uefa should think of harsh punishments, otherwise there will be no financial fair play.
“Let’s take the example of Manchester City. How does it work when you write about 200 million (£194.9m) loss?
“The working group of the Uefa is required here to establish strict penalties. Some clubs want leniency, but in the final analysis, only the exclusion from the international competitions or the non-licensing for the European competitions or Champions League place (is appropriate.)”
Rummenigge also went on to outline the reasons that Dutch, Belgium and Austrian clubs should all get behind the FFP proposals.
Perhaps somewhat unwisely, Mancini decided to hit back at Rummenigge’s comments. Mancini explained
"This has been six months now that he talks against us. He says he hopes Napoli get through to the second stage [instead of City]. “But you don’t want to see an important man like Rummenigge, who is the Bayern Munich president and a representative of a top club in the world, saying things against us. There are other teams in Europe that have a problem with Financial Fair Play, not only Manchester City.”
Although, Mancini’s comments "I think Manchester City are working for this FFP for the next two years” will have raised some eyerows given that the club lost nearly £200m in the financial year that ended just 5 months ago.
Summary and improved translation of Rummenigge’s comments:
Mancini hits back
With a UEFA committee due to meet in January to determine the punishment tariff for FFP breaches, an interesting suggestion has been proposed by a blogger at http://www.maracanazo.com/ . UEFA's previous plan to impose a transfer ban for certain FFP breaches seems to have hit the buffers (due to restraint-of-trade issues and the fact that control of player registrations rests with FIFA and national associations, rather than UEFA). The enterprising blogger proposes that teams who enter the Group Stage of the Champions League (and Europa League) would be docked points based on the level of FFP overspend. The devil is always in the detail, but with UEFA seemingly having few tools in at their disposal to punish transgressors, we might not have heard the last of this idea.
The Telegraph published a significant FFP article which maintains that UEFA have had to withdraw one of the proposed punishments for exceeding the Break Even deficit. The use of a transfer ban was put forward as a favoured punishment at the ECA in September (see article below). However it appears such a ban would fail the EC's restraint-of-trade rules. This seemingly leaves UEFA with only three options:
- Levy fines as a punishment (however the irony of being able to buy your way out of the Financial Fair Play requirements will not be lost on many UEFA members).
- Defer FFP until after Blatter retires from FIFA in 2015 and is replaced by Platini.
- Impose UEFA competition bans on the worst FFP transgressors
Of the three options, UEFA may decide to defer FFP implementation and punishment, citing the Eurozone/recession problems as the reason behind the delay.
For another example of how this works go to www.sportingintelligence.com:
- Reduced spend on transfer fees for new players
- Reduced spend on wages
- Increased sponsorship income (possibly including selling stadium naming rights)
- Increased match-day incomes
all is not well at Sunderland. Gates are 3,000 down on last season (comparing the same fixtures over the two seasons); they are hovering
above the drop-zone with only one win this campaign, and the club have lost £23.5m and £25.5m over the last two seasons. Ellis has sent Quinn to South Korea in an attempt to bring in some desperately needed commercial funding. Niall will have his work cut out - Sunderland are hardly a global brand and other, more successful, clubs with greater fan-appeal have been fishing in the same pond for several years.
When Quinn 'sold' the Sunderland vision to Short, it was very much portrayed as a 'Field of Dreams' - build it and people will come. Back in March 2010 Quinn said. "People say, ‘Why is he here?’ It's the potential which is why he’s putting all this money in; he wants the asset to grow and he feels in five to ten years that the asset will be worth far more than it would if he had just let it go. He feels it will be good value in time, especially with the way the world [television] rights are going.
After having pumped in £67.5m of his own money into the club over the last 18 months, the dream has turned into a bit of nightmare and success is
further away than ever . Short is seemingly not happy with Quinn's performance as Chairman and the Irishman faces a tough job to build the
brand in the Far East when the supporters in the North East are losing interest.
Ellis Short has dug-deep in his financial support for Sunderland - he put in £19m of equity (i.e. not loans) into the club earlier this year, in
addition to the £48.5m he stumped up the previous year. Short is a very wealthy individual and his personal wealth is usually given as $1.2b. However his background is in banking and investments (a sector that has seen 25% falls over the last quarter) so things may not be quite as rosy
for Ellis as they were this time last year.
Short is quite right to point out the FFP issue at Sunderland. However, the issue runs deeper than the obvious challenge of reducing the
club's losses to within the E45m maximum Break Even Deficit over the Monitoring Period that covers 2011/12 and 2012/13 seasons. Under FFP rules, a club is only able to lose more than E5m over the current two-year Monitoring Period if there is an injection of Equity to cover the loss. This
means that Short will have to put his hand in his pocket yet again and fork-out up-to E40m. This, of course, assumes that Sunderland will continue to apply for a UEFA licence on the off-chance that they will eventually secure for a the Europa Cup or Champions League place.
With the financial reporting season upon us, the impact of FFP is starting to hit home with club owners. Although clubs are able to report a deficit of up to E45m during the current two-year Monitoring Period, clubs are only able to record this level of loss if the owners are willing to put their hands in their pocket and inject Equity that will cover all any deficit amount over E5m. Where the owners are not willing to subsidise the club in this way, the maximum permitted loss is only E5m for the Monitoring Period that covers 2011/12 and 2012/13. For the likes of Abramovic and Sheikh Mansour this will not present any problem but there are issues for other Premier League Clubs. All clubs wishing to take part in UEFA competitions are required to apply for their UEFA licence in advance of securing their qualification for the competitions. In practice this means that the owners of Stoke, Newcastle, Bolton and the other clubs hoping to win an UEFA place will need to put their hands in their pockets to fund the deficit, rather than saddle the club with debt.
Arsenal are viewed by UEFA as a role model - they play nice football, are not owned by a 'Sugar Daddy', they have built a lovely new stadium and operate on financial model that will seemingly ensure FFP compliance. UEFA will therefore have been pleased to read Arsenal's recent financial results (their last ones to be produced before the first Monitoring Period). Although Arsenal announced a profit of £15m before tax, they recorded a profit of just £2.2m once transfers are factored in. In many ways these results indicate how difficult several English clubs will find complying with the FFP rules - if Arsenal, with the benefits of their world-beating corporate facilities, few expensive player purchases and a reasonably rigid salary structure, can only break even, it will be extremely difficult for some of the other Premiership teams to comply.
'front-end-loaded' - however a deal structured this way is likely to result in problems for further down the line if the City Academy and Hotel complex do not deliver significant results.
Privately, a number of sports and financial journalists believe some clubs will fail the meet the FFP criteria. However people are reluctant to put
their heads over the parapet and say as-much publically. Things are starting to change. In an article published by Reuters, Neil Patey from Ernst &Young (a former Abramovic adviser according to the Edinburgh Evening News) has stated publically that he expects some clubs to fail the FFP test.
fail to meet the regulations first time around," said Neil Patey, a soccer
industry adviser at global accountancy firm Ernst & Young. "I think there's
a high chance Chelsea, Man City and Inter Milan will fail (to balance their
books). If Barcelona and Manchester United failed, UEFA would find it
difficult to not have them in European competition and I think UEFA are
praying that doesn't happen."
similar sized fleet to UK-based Flybe, have reportedly paid City around £400m in a 10 year deal which will extend the existing shirt-sponsorship
deal and re-brand City's stadium complex as "The Etihad Campus". Not all of the Etihad funds will be used to boost City's coffers for the purposes
of FFP - a reported £100m has been earmarked for an extensive development programme which provide a hotel, call centre, training pitches and a
state-of-the art Academy set-up. Although any expenditure on the youth-team set-up and the the stadium infrastructure is exempt from FFP
calculations, the eventual financial benefits of such an investment can beused to offset the club's wage-spend.
Barcelona unveiled their new shirt bearing the Qatar Foundation logo. Barcelona President Sandro Rosell and coach Pep Guardiola championed Qatar's successful World Cup bid and were rewarded with the E170m 5-year deal just 8 days after the World Cup hosts for 2022 were announced. Barcelona had been struggling to comply with the FFP criteria and desperately needed the income from this huge deal. The Spanish FIFA delegation were also keen to arrange a reciprocal voting arrangement with Qatar that would have seen Spain hosts for the 2018 competition.
The Qatar Foundation is a charity run by the Qatar ruling family and announces that it "aims to support Qatar on its journey from a carbon economy to a knowledge economy by unlocking human potential". However, not everyone was happy at this piece of business - the former Barcelona President Joan Laporta did not attend the vote on shirt deal, saying that it made the Spanish champions look like Qatar's national team. Prior to the Quatar deal, the club had previously given the Unicef logo pride of place on the centre of their shirts.