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Financial Fair Play: one for the future or heavily flawed?

01 Dec 2012, 10:55 IST

MUNICH, GERMANY – MAY 19: Chelsea players celebrate with the trophy after their victory in the UEFA Champions League Final between FC Bayern Muenchen and Chelsea at the Fussball Arena München on May 19, 2012 in Munich, Germany.

With the ever increasing inflation of the European transfer market, investing huge amounts to remain competitive is the need of the hour for the so called ‘big teams’. For most clubs, players and fans around the world, success is the most important part of a football club. Most clubs, if not all of them, are judged on their on-field performances. In such conditions, being competitive holds great importance.

With the advent of the 21st century, a large amount of money has been introduced into football. With Russian Tycoon Roman Abramovich buying Chelsea FC for £140 million in early 2003, there began a new era in European football. Spending around £450 million in a period of eight years, Chelsea started the long process of ‘building a club’ in his own new way. Luring players with astronomical wages and spending huge amounts on talent, Roman paved the way for transforming Chelsea from a UEFA Cup playing club to a top-four club and then into one of the finest clubs in the world all of this on the basis of huge investments backed by his huge income from the oil industry.

For clubs such as Chelsea, or Manchester City whose owners have self-sustainable money, compounding losses of four hundred-odd million pounds, wasn’t a big deal. But for the likes of Portsmouth, Leeds United, or Notts County from the lower leagues, or for that matter Liverpool or Manchester united (two of the biggest clubs in England) who were sunk in debt, clearing these losses was more than a mountain to climb. For such an owner, whose club suffers losses of millions of pounds, it seems strange they would still believe in holding on to their chair as owners of the club, despite the massive dip on the balance sheet.

According to Dan Jones in Manchester, who is a UK-based lead partner of the Sports Business Group of American company Deloitte Consulting, owning a football club is a statement that you are at a certain level as a businessman.

LONDON, ENGLAND – FEBRUARY 26: Steven Gerrard of Liverpool lifts the trophy in victory after the Carling Cup Final match between Liverpool and Cardiff City at Wembley Stadium on February 26, 2012 in London, England. Liverpool won 3-2 on penalties.

Just to give you an example, in September-October 2010, Liverpool FC were sold to Fenway Sports Group. The sale of the club cost principle owner J. W. Henry £350 million, with a clause which stated that the looming debt of the same amount on the club, caused by the loan issued in the purchase of the club by buyers Tom Hicks and George Gillett, the ex-owners, would be cleared with immediate effect. With such being the amount of money that J.W. Henry had to fork out for a stagnating team, out of the Champions League and not even in competition for the league title, the decision to shell out a near £700 million seems, either fanatical or foolhardy to look at for all those who distance themselves from the ownership of such a club.

“A businessman could derive personal and potentially commercial benefits from an association with a football club. There is a global TV audience out there that is worth billions and billions of dollars if you can get that audience to watch the league”

Simon Wilson, partner at the restructuring and advisory practice of New York-based corporate advisory Zolfo Cooper.

Business status cannot be the only reason for owners to oblige to such dealings. For me, the major reason for owners to oblige is their belief in structuring a perfect sustainable model of the club. A model by means of which the club can sustain the small, or big losses, make profits and keep fans happy with the club’s on field performances. Those who invest in such ventures firstly have faith in football remaining a major entertainment for years to come and through occasional downs and more frequent ups, yield handsome long term returns.

These investors therefore, particularly those among them who have the financial staying power from other high yielding sources look upon investment in football clubs as sound one.

MANCHESTER, ENGLAND – MAY 13: Vincent Kompany the captain of Manchester City lifts the trophy following the Barclays Premier League match between Manchester City and Queens Park Rangers at the Etihad Stadium on May 13, 2012 in Manchester, England.

In a survey leading to the introduction of the Financial Fair Play carried out by UEFA, the governing body of football in Europe, it was found that, out of the 665 clubs in Europe, more than 340 clubs were in debt. Although about 20% of these clubs were capable of at least reducing these huge debts they face due to the generosity of their owners, the rest were in financial peril, with a few even facing liquidation in the near future.

In the face of the express concern from a majority of clubs in Europe, UEFA came up with a plan that would provide a ‘level playing field’ for all the teams that would participate in various European tournaments. Financial Fair Play was accepted principally by the UEFA council in September 2009. The basis of which being that a club could invest only as much as they earned in the preceding season.

This might give you a hint as to why this rule looked obligatory for UEFA to make. A report from the accountants Deloitte shows that the net debt, among the 20 Premier League teams that contested the Barclays Premier League season of 2008-09 was 3.1 billion Pounds.

Astounded? You should be!

Prior to the inclusion of FFP, many teams invested majorly in players. West Ham were one of the many. Between 2005 and 2010, West Ham United recorded a net 90 million worth losses. Even Everton, who were highly complimented for working on a stringent transfer budget noted losses worth 29.12 million pounds.

But the worst amongst them were Portsmouth, who had were forced into administration, with liquidation hanging over their heads as an outstanding bill for income tax forced a winding petition from H.M. Revenue and Customs. This led to a 9 point deduction, and finally, relegation.

This makes FFP sound reliable when it comes to to knocking some sense into investors. UEFA could see the entire system crumbling. The very fact that a football player is an intangible asset, and hence the dealings of such an asset have to be done diligently is of prime importance. The valuation of an intangible asset should depend upon its market value, rather than upon depth of the bank account of the offering party. In such circumstances it seemed vitally necessary that a check was made upon how much each team would invest for the better tomorrow of European football.

All this said and done, there has been a massive criticism of FFP. The major criticism of the system being that it would once and for all cement the big clubs and make them unreachable, widening the gap between the top and the bottom. For eg: a Stoke City, a Hull City or a Swansea city would never have the same annual income as Chelsea, or Liverpool, never mind Manchester United. Evidently, they would invest less even if their owner turned out to be extremely affluent, thus raising a different problem.

NEW YORK, NY – AUGUST 10: In this handout photo provided by the NYSE Euronext, Manchester United Executives David Gill (L), Joel Glazer (3rd L) and Avram Glazer (4th L) prepare to ring the Opening Bell at the New York Stock Exchange on August 10, 2012 in New York City. Manchester United shares started trading at USD 14.05 at the opening of the New York Stock Exchange.

Secondly, the prize money that the UEFA Champions League winner gets is the same as that given to the winner of the Premier League, that being 60 million Euros. A team winning Europe’s elite silverware has to play only 13 games, starting from the six in the group stages, whereas the league winner has to play all of 38 games over a period of 10 months.

Another gigantic loophole in the FFP is the fact that the teams are allowed leeway until 2014. Clubs will not have to account for the wages of those players that were signed in or before 2010 on their balance sheets. There is also potential for legal action to turn the legislation and for larger clubs to artificially raise their incomes from massive sponsorship deals, via stadium naming rights , overseas sponsorship deals etc.  There also exists a problem of widely differing tax rates as well as social security costs.

Some teams in some leagues have to pay the same player an extra amount for the player to end up with the same amount of money as he would at another club with lesser value. All these factors have to be considered by the governing body, for a brighter tomorrow

The concept of FFP is one that will definitely increase the stability of a football club in all terms. But the fact that it will only widen the gap between the top and the bottom has to be remembered by UEFA. On a wider look at things, from every perspective, this seems to be a no-go.

The need for a system that will help restricting the huge amounts of money being sent into the market is the need of the hour. But this system that FIFA and UEFA have employed looks rather ironic when one looks at its actual name, because it does not by any means seem fair. An economy is termed poor if the rich get richer and the poor poorer. An analogy can be drawn between this economy and the system that UEFA are deploying.

There needs to be more thought going into this on the whole. This system if adopted might leave a huge void between the top division and the divisions below it. UEFA have to give their system a close look for the betterment of tomorrow’s world of football.

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