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Whenever a club like Chelsea or Manchester City does a big money signing, everyone thinks that UEFA Financial Fair Play Regulations will be there to hurt these clubs in future. Teams like Arsenal take pride in their financial stability , believing that the kicking in of FFP will help their cause. However this is far from true. UEFA Financial Fair Play Regulations has a lot of loopholes which make it very easy for a club to comply with the rules. UEFA’s new regulations won’t affect any top EPL clubs at the moment.
The first monitoring period based on UEFA FFP started last season, which is basically looking at the accounting books of the club . This period includes seasons 2011/12 and 2012/13. Even though clubs are allowed to have a maximum deficit of €45 after the end of first monitoring period, spending by the top clubs in the transfer market has not reduced. Manchester City, Chelsea, Manchester United, Liverpool continue spending in spite of deficit. All the clubs will be affected by FFP for the first time in the 2014/15 season. The acceptable losses for each monitoring period can be seen below:
The maximum acceptable loss for the first monitoring period is €45 million only if the owner is willing to put in his own money for losses greater than €5million. If the owner is unable to invest, then the losses limit if €5million. With Manchester City having a deficit of €150million and estimated operating losses of €70million in the first monitoring period, Chelsea having a deficit of €70 million and Liverpool having an estimated operating losses of €50million in the first monitoring period, the chances of these clubs to comply with the FFP look very bleak but it is not so. So let’s see how the big clubs will beat the FFP.
1) Amortisation
Amortisation is simply distributing the transfer fee of a player over a period of the players contract. For example, Eden Hazard was signed for €38m on a 5 year contract. To UEFA, his expense isn’t €38m in 2012/13. Instead, it is €7.6m per year till 2017/18. Same for Torres. He costs Chelsea €10million per year instead of €50million for one season which makes it easier to balance the books. Manchester United purchased Kagawa for €22million with a 4 year contract, hence the players cost per year excluding wages is approximately €6million.
By the third monitoring period the clubs along with €30million deficit limit for the 3 year period, are allowed to have only €10million deficit per season. Amortisation helps in meeting this requirements by distributing the player’s cost over many years.
So if a club gives out longer contracts, they have lower deficits per season.
Due to Amortisation there is something called ‘book value’ of a player. We can see it below:
So from here we can see how the book value reduces at the end of each year. Now if Chelsea sell Torres at the of term three for €30million , then the club will earn a profit of (€30million-€20million)= €10million profit instead of a (€50million- €30million)= €20 million loss in their accounting books because Torres’ book value at the end of year 3 is €20million. Similarly if United sell Kagawa at the end of year three for €30million then they will earn a profit of €24million instead of €8million.
2) Player Contracts
As per UEFA Financial Fair Play Regulations, if a club exceeds the €45million deviation limit and the main cause for that is the salaries of the players who signed contract before 1 June 2010, then the salaries of those players won’t be counted. In simple words, the players who signed their contract before 1 June 2010, are free for the club. Unless the contract of the player is extended after 1 June 2010, the cost of these players won’t be counted in the accounting books.
This rule helps in removing the deficit very easily. Manchester City has a deficit of €150million and most of their revenue of €152.8million will now be used to balance the books as the players are playing for free. Players like Vincent Kompany, Carlos Tevez, Micah Richards have signed contracts before 1 June 2010 and are free for the club.
Even in Chelsea, the contracts of most of the players were extended long term before June 2012.
3) Sponsorship and TV rights
Sponsorship is another major factor in beating FFP. In case of Manchester City we can see how the sponsors are linked to the owners. Shirt sponsor Etihad Airways, telecommunications company Etisalat, Abu Dhabi Tourism Authority and investment company AABAR are all based in the Middle East. Even Ferrostaal, a virtually unknown German engineering company, has been taken over by the Abu Dhabi government. Man City recently completed a £400 million deal for renaming their stadium as Etihad Stadium.
After Champions League victory, Chelsea signed many lucrative sponsorship deals with companies like Delta Airlines, Audi and Gazprom.
Manchester United have a sponsor for training kits, online betting and every other small thing.
“Many of the more recent deals like Etihad’s long-term agreement with Manchester City and Chelsea’s arrangements with Gazprom have prompted some to suggest such sponsorship deals are a convenient way to use the facade of a sponsorship deal to boost revenues,” -football finance expert Daniel Geey of London firm Field Fisher Waterhouse
It is very easy for top clubs to get sponsors who become a source of cash for the clubs. We already saw in the case of Man City that there is little UEFA can do about it.
EPL’s huge audience helps in lucrative TV deals. The Premier League recently signed a new TV deal of £3.5billion for a period of 3 years. This deal ensures that the clubs now earn £15million more than what they earned from the previous TV deal of £1.4billion.
4) Infrastructure and Youth Team development
UEFA won’t count the money spent by clubs on infrastructure like training grounds and Youth team development as expenditure. This helps in reducing a significant amount of €19million from Chelsea’s €70million loss last season. As infrastructure, Manchester City’s cost of building Etihad Campus is not counted as expenditure in the FFP calculation, but the income generated from the campus is.
Clubs can build sporting facilities, hotels and expand their stadium for generating extra revenue. One can look at the Turkish Club, Trabzonspor, to understand the scope of balancing books through infrastructure development. Trabzonspor will build a hydroelectric plant in a bid to raise revenues.The plant is expected to cost an estimated $50 million, with annual revenues expected to be $10 million a year. The cost of building the hydroelectric plant will not be considered under FFP but the income will.
5) Ticket Prices
All the top clubs in EPL except Manchester United and Arsenal sell tickets to their fans at a subsidised cost. Manchester City last year had a loss of £137 million, Chelsea £60million and Liverpool £18 million due to reduced ticket prices. Man United and Arsenal made a profit of £21 million and £32 million respectively through ticket sales. If the subsidies are removed by the clubs, then a lot of profit can be made. This source of revenue is completely in the hands of the club. Higher ticket prices will mean lesser losses and better profits.
Somewhere on the net an interesting question was asked. “What if Man City decide to build a special executive box and charge £50million for the ticket and the owner buys the ticket?” A very simple question, but very difficult to answer!
