Wednesday, September 5, 2012

UEFA's FFP Regulations - Play To Win

So the transfer window is finally over after the customary twists and turns and, as always, has raised some intriguing questions. Perhaps most perplexing is the decision of previously big spending Manchester City to slam on the brakes (by their own recent standards) much to the disappointment of manager Roberto Mancini. On the fairly safe assumption that this is not due to Sheikh Mansour struggling for cash, the culprit is likely to be UEFA’s Financial Fair Play (FFP) regulations, a particularly delicate issue for the blue side of Manchester.

Given that looming threat, it is equally puzzling to see that Chelsea, who have had their own problems in reaching self-sustainability, have once again started to splash the cash, laying out £32 million on the supremely talented Eden Hazard and £25 million on the precocious Oscar – all in apparent blithe disregard of FFP. It therefore might be interesting to revisit these rules in an attempt to understand clubs’ behaviour in the new era of tighter financial regulation. Will they have a profound impact on the face of European football or merely act as a “speed bump”, as predicted by Premier League chief executive Richard Scudamore?

At its simplest FFP is trying to encourage clubs to live within their means, i.e. not spend more money than they earn. This is UEFA’s response to the poor financial health of many clubs, as evidenced by their most recent benchmarking report, which revealed that in 2010 over half of Europe’s top division clubs lost money with total losses surging 30% to €1.6 billion and debts standing at €8.4 billion. Many clubs have experienced liquidity shortfalls, leading to delayed payments to other clubs, employees and tax authorities.

"Eden Hazard - everything counts"

Gianni Infantino, UEFA’s general secretary, described this as “really the last wake-up call.” He added, “There was a great risk of crisis, of the bubble bursting. You can see from the losses and the debts that the situation is not healthy and we cannot go on like this. We had to do something and financial fair play is the way we designed it.” UEFA’s president, Michel Platini, is even more evangelical, considering FFP “vital for football’s future.”

The aim is to introduce more discipline within club finances, encourage responsible spending and investment and to curb the excesses and individual gambling on success, which has brought many clubs into financial difficulties.

While Infantino conceded that over-spending “may be sustainable for a single club, it may be considered to have a negative impact on the European club football system as a whole.” He explained, “The problem is that all clubs try to compete. A few of the biggest can afford it, but the vast majority cannot. They bid for players they cannot afford, then borrow or receive money from their owners, but this is not sustainable, because only a few can win.” In other words, the richest clubs drive up players’ salaries and transfer costs, forcing smaller clubs to over-stretch their budgets to compete.

We’ll explore the moral issues surrounding FFP later, but let’s first look at how it will work in practice. The first point to note is that clubs do not actually have to break-even in the early years of FFP to meet the target, thanks to the concept of “acceptable deviations”, which is one way UEFA has attempted to facilitate the move towards a sustainable model.

The first season that UEFA will start monitoring clubs is 2013/14, but this will take into account losses made in the two preceding years, namely 2011/12 and 2012/13. Wealthy owners will be allowed to absorb aggregate losses of €45 million (£36 million), initially over those two years and then over a three-year monitoring period, as long as they are willing to cover the deficit by making equity contributions. The maximum permitted loss then falls to €30 million (£24 million) from 2015/16 and will be further reduced from 2018/19 (to an unspecified amount).

This approach was explained by Infantino, “You can have losses for one year, because perhaps you had one bad season and you did not qualify (for Europe). So we are looking at losses over a multi-year basis. So one year you can make a loss, but not over three years.” This makes sense, though some clubs might simply make operating losses every year and get within the break-even target by hefty player sales in one year.

UEFA’s willingness to give the clubs every chance to meet FFP is also seen by the decision to have only two years in the first monitoring period, as this means that the annual average loss can be higher than future monitoring periods.

"Santi Cazorla - you don't have to spend big"

It is important to note that these are the acceptable deviations only if the owner is willing and able to put money in. If not (as is the case for many clubs), then they are significantly lower at just €5 million (£4 million). For the likes of Abramovich and Mansour, this will obviously not be an issue, but their ability to cover large deficits will be much reduced, as noted by Infantino, “I wouldn’t say the era is dead, but I would say what is over is the sugar daddy who can put hundreds of millions into the clubs. This will no longer be possible.”

Note that the rules do not actually force a club to become profitable. All that UEFA are saying is that clubs will not be allowed to compete in their competitions (Champions League and Europa League) if they do not break-even, but clubs making losses could continue to compete in their domestic league. The first sanctions for clubs not fulfilling the break-even requirement can be taken during the 2013/14 season and the first possible exclusions relating to break-even breaches would be for 2014/15 season.

OK, that’s the theory, so what’s the current state of play for the leading English clubs?

The last published accounts available are those for the 2010/11 season, in other words the one before the first season included in the FFP calculation. Nevertheless, this should still give us a strong indication of how close clubs are to meeting the FFP target.

Taking those clubs that qualified for Europe this season as our examples, four clubs made a pre-tax profit (Newcastle £33 million, Manchester United £30 million, Arsenal £15 million and Tottenham £402,000), while three clubs reported large losses (Manchester City £197 million, Chelsea £67 million and Liverpool £49 million). So, on first glance, those three face a severe challenge to get their finances in order to meet FFP.

However, there are two major adjustments that need to be made to a club’s statutory accounts to get to UEFA’s break-even template: (a) remove any exceptional items from 2010/11, as they should not re-occur (by definition); (b) exclude expenses incurred for “healthy” investment, such as improving the stadium, training facilities or academy, which would lead to losses in the short-term, but will be beneficial for the club in the long-term.

Let’s be very clear here: so-called exceptional costs will be included in the break-even calculation, but it is unlikely that they will be at similar high levels to 2010/11, when clubs could take the opportunity to clean house in the last accounts not to be included for FFP.

This was a significant factor for all three clubs that reported large losses with Liverpool booking £59 million (mainly writing-off stadium development expenses), Chelsea £42 million (largely management compensation paid to the sacked Carlo Ancelotti and the cost of buying-out André Villas-Boas from Porto) and Manchester City £34 million (mostly writing-down the remaining book value of certain players).

Excluding exceptional items, Liverpool would have reported a £10 million profit, while the losses at Chelsea and Manchester City would have come down to £26 million and £163 million respectively, so things would already look better for them in a “normal” year (though Chelsea’s manager pay-offs have been a fairly regular occurrence and the 2011/12 figures will again be hit, this time by AVB’s departure).

Next, there can be significant costs excluded for the FFP calculation, which is best illustrated by looking at Arsenal’s accounts. The costs of building the Emirates stadium are deducted, namely the depreciation charge on the tangible fixed assets of £12 million and possibly interest on the bonds of £14 million (though the latter is a bit questionable, now that the asset has been constructed). In addition, they will be able to deduct costs on youth and community development. Unfortunately, these are not separately identified in club accounts, but we can estimate £10 million and £2 million respectively for these activities. So, in total Arsenal’s relevant expenses for the FFP break-even calculation will be around £39 million lower than the published accounts.

However, Arsenal will presumably also have to exclude the £13 million profit from their property development business, as revenue and expenses from non-football activities are not relevant for FFP - unless it is allowed, because it is "in close proximity to the club's stadium". In our calculations, we shall adopt a conservative approach and exclude it.

Not all interest expenses can be excluded, e.g. Manchester United’s annual £40-45 million is taken into consideration, as their debt was incurred to help finance the Glazer’s leveraged takeover, as opposed to positive investment in the club. Incidentally, if the club ever pays dividends to their owners, these would also be included. Fortunately for United, these hefty interest payments are more than covered by their huge operating profits.

After all these adjustments, most of the English clubs look to be well placed for FFP. Even Chelsea’s FFP loss has come down to only £8 million, which is well within the acceptable deviations and helps explain why they felt that they could continue spending in this summer’s transfer window, especially as their income will be boosted by more revenue from their Champions League triumph.

The only club that looks vulnerable is Manchester City, whose loss for FFP is still a frightening £142 million. Indeed, the club’s sporting director Brian Marwood admitted, “We’ve got a huge amount of work ahead of us to make sure we are sustainable.” They will benefit from rapid revenue growth, both in terms of distributions from the Champions League and (especially) new commercial deals, but the chances are that their losses will still be well beyond UEFA’s limits in the short-term.

"Roberto Mancini - it's not about the money, money, money"

However, a safety net might be provided by yet another exemption in the FFP rules, whereby UEFA will not apply sanctions, if: (a) the club is reporting a positive trend in the annual break-even results; (b) the aggregate break-even deficit is only due to the annual 2011/12 break-even deficit, which is in itself due to player contracts signed before 1 June 2010 (thus excluding wages for the likes of Carlos Tevez, Gareth Barry, Vincent Kompany, Joleon Lescott and Kolo Toure). Even that might not be enough, though UEFA will surely take note of City’s £100 million investment in their academy, plus their relative restraint in the transfer market this summer.

The other point that should be highlighted is the potential importance of profits on player sales to a club’s accounts, e.g. Liverpool’s 2010/11 figures were boosted by £43 million (mainly Fernando Torres to Chelsea) and Newcastle’s by £37 million (largely Andy Carroll to Liverpool). Excluding these sales, Liverpool’s FFP result would actually have been a £20 million deficit, so it’s not quite plain sailing for them.

By the way, Arsenal’s FFP figures for 2011/12 and 2012/13 should be hugely positive, thanks to major profitable sales of Cesc Fabregas, Samir Nasri, Robin Van Persie and Alex Song. This has been a key element of Arsenal’s self-sustaining strategy in recent years.

Of course, Manchester City are by no means the only major club that face a major challenge to meet FFP (though you might think so from the media) with the leading Italian clubs also having much to do, especially Milan, Inter and Juventus, whose last reported losses averaged more than £70 million (before FFP adjustments). Indeed, Milan vice-president Adriano Galliani admitted, “FFP hurts Italy. There will no longer be patrons that can intervene. Until now people like Berlusconi and Moratti would be able to support us, but with the fair play it will no longer be possible.”

This helps explain much of this summer’s activity in Serie A, especially at Milan, who have effectively been forced to sell Zlatan Ibrahimovic and Thiago Silva to the nouveaux riches at Paris Saint-Germain, while spending very little on replacements. Clearly, there are other factors here, not least the economic crisis in Italy and Fininvest’s own financial difficulties, but FFP certainly played a part in this strategy. In addition, it provides a rationale for Inter selling a 15% stake in the club to China Railway for €75 million, as this will help fund a new stadium with these costs being excluded for the purposes of FFP.

"Robin Van Persie - jumping someone else's train"

At the other side of the spectrum, clubs like Real Madrid and Bayern Munich will have absolutely no problems with FFP, as they are consistently profitable year-after-year. Bayern have been well-known supporters of FFP, but even Jose Mourinho has commented on the likely impact, “The club produces its money by itself, so Real Madrid will be in a much better position when FFP comes.” Barcelona’s figures are a bit more up and down, but they recently announced record profits of €49 million for 2011/12, so they’re also looking good.

The stated objective of UEFA’s regulations is, “to introduce more discipline and rationality in club finances and to decrease pressure on players’ salaries and transfer fees” and it is true that there has been a general reduction in transfer spending in European football, particularly Italy and Spain.

However, the £490 million spent by Premier League clubs on transfers in this summer is actually slightly higher than last summer and second only to the £500 million record outlay in 2008. Of course, it is arguable that this expenditure would have been higher without the presence of FFP, but what does seem clear is that some clubs have opted to try to increase revenue rather than cut costs – a classic example of the economic law of unintended consequences.

Thus, most leading clubs have managed to substantially grow their revenue since UEFA approved the FFP concept in September 2009, e.g. the revenue at Barcelona, Real Madrid and Manchester United rose £76 million, £71 million and £53 million respectively, though the 76% increase in Manchester City’s revenue from £87 million to £153 million is perhaps even more striking (with much more to come).

Let’s look at how clubs have grown (and will hope to grow) their revenue streams in future.

The main driver of higher revenue in England has been the Premier League television deal. For an individual club, this is partly down to its own success on the pitch, but is far more due to the ever-increasing amounts negotiated centrally.

This is because the distribution methodology is fairly equitable with the top club (Manchester City) receiving around £60.6 million, while the fourth club (Tottenham) gets £57.4 million, just £3.2 million less. You will see that the lion’s share of the money is allocated equally to each club, meaning 50% of the domestic rights (£13.8 million in 2011/12) and 100% of the overseas rights (£18.8 million), with merit payments (25% of domestic rights) only worth £757,000 per place in the league table and facility fees (25% of domestic rights) fairly similar, based on the number of times each club is broadcast live.

What has really helped clubs’ top line is the Premier League’s ability to secure top dollar deals for its TV rights, as once again shown with the amazing £3 billion Premier League deal for domestic rights for the 2014-16 three-year cycle, representing an increase of 64%. If we assume (conservatively) that overseas rights rise by 40%, that would mean that the total annual TV deal from 2014 would be worth £1.7 billion compared to the current £1.1 billion.

Under current allocation rules, that would imply an additional £30 million revenue a season for the leading English clubs, not only strengthening their ability to compete with overseas clubs, especially Madrid and Barcelona, who benefit from massive individual TV deals, but also providing a significant boost in their FFP challenge in the future – assuming that they don’t simply pass all the extra money into the players’ bank accounts.

With revenue from the Premier League much of a muchness for the leading English clubs, the importance of finishing in the top four and qualifying for the Champions League is very evident. Although it may not be a huge percentage of a club’s total revenue, it is clearly a significant competitive advantage.

The Europa League is small compensation financially, as can be seen by the sums received in last year’s campaign, where Stoke City’s €3.5 million (the highest for an English club) was considerably lower than the sums received by the Champions League entrants: Chelsea €60 million, Manchester United €35 million, Arsenal €28 million and Manchester City €27 million.

This is the great dilemma for clubs like Manchester City. For their commercial strategy to work, they absolutely have to be playing in the Champions League, but the expenditure required to get there places them at great risk of failing UEFA’s regulations. It’s a vicious circle, made worse by the possibility of exclusion from Europe’s flagship tournament, which would then make it even more difficult to meet the FFP target, as the club would lose at least £25 million revenue.

In terms of match day revenue, here are a number of ways of increasing revenue, the best of which is to be successful, which should result in more games played, due to cup runs, Champions League, etc. A somewhat less palatable tool has been for clubs to raise ticket prices, though the current economic climate means that this has slowed right down this season with prices frozen at Arsenal, Chelsea, Liverpool and Manchester United. Championship side Derby County has even introduced demand based pricing services for single match tickets for the 2012/13 season.

Of course, a real quantum leap in match day revenue can only be achieved via stadium expansion or building a new stadium. This can be very clearly seen with Arsenal’s revenue rising by nearly £50 million a season since they moved from Highbury to the Emirates. It’s not just the higher capacity, but also many more premium customers and indeed higher prices. The Glazers’ willingness to raise ticket prices plus the completion of the upper quadrants at Old Trafford (and, yes, more of the “prawn sandwich” brigade) has also helped Manchester United to substantially increase their match day revenue to well over £100 million.

This has resulted in United and Arsenal both earning much more than their peers per game: £3.7 million and £3.3 million compared to Chelsea £2.5 million, Tottenham £1.6 million and Liverpool £1.5 million. This explains why all of those clubs have been looking at stadium moves for some time, though their struggles have highlighted how difficult this is. On the bright side, if they found the right site, any costs associated with a move could be excluded for FFP – though there would then be the small matter of actually finding the money to finance the project.

Another interesting factor here is that the FFP regulations explicitly include membership fees within relevant income, which is a major benefit to clubs like Barcelona and Real Madrid, who take in around £20 million a year from their members. Arguably, this is a form of capital injection from the club’s owners, so should not be treated as relevant revenue, but UEFA have decided that this is different from one large payment from a wealthy owner.

Traditionally English clubs have not focused much on the commercial side of operations, as they have been able to sit back and rely on the TV money, but that has been changing. Many have made great strides recently, most notably Manchester United who have broken the £100 million barrier, but they are still left in the shade by their continental peers, especially Bayern Munich £161 million, Real Madrid £156 million and Barcelona £141 million.

Nevertheless, there has been a significant increase in the value of shirt sponsorship deals in England with Liverpool and Manchester City both going from £7.5 million deals to £20 million with Standard Chartered and Etihad respectively. Tottenham have introduced an innovative split of their shirt sponsorship between software company Autonomy (now Aurasma, one of their products) for the Premier League and asset management group Investec for all cup competitions worth a total of £12.5 million, much better than the previous £8.5 million deal with Mansion.

However, United are still undoubtedly the daddy when it comes to sponsorship deals. They switched to Aon from AIG in 2010/11, increasing the annual value from £14 million to £20 million, but have recently announced a truly spectacular deal with Chevrolet. Not only will this rise to an astonishing £45 million ($70 million) in 2014/15, but the sponsor will also actually pay them £11 million in each of the previous two seasons – while Aon are still the sponsors. Amazing stuff, but this is the club that has racked up numerous secondary sponsors and persuaded DHL to pay £10 million a season to sponsor their training kit.

Even the noble Barcelona have been forced to take shirt sponsorship, switching from the unpaid UNICEF to a very lucrative £24 million a year with the Qatar Foundation. Other clubs have also been keen to get in on the act with Newcastle’s £10 million Virgin Money deal being £7.5 million higher than Northern Rock and Sunderland’s barely credible £20 million Invest in Africa deal being just the £19 million more than the previous Tombola deal.

All of this is leaving Arsenal way behind the rest with a measly £5.5 million Emirates deal, a legacy of a deal that helped finance the stadium construction. There will no doubt be a major increase in 2014 when the deal runs out, but you can’t help thinking that the club’s commercial team should have done more, especially when you compare their tiny revenue growth to United’s.

"John W Henry - FFP's No. 1 fan?"

Similarly, clubs have done well in improving their kit supplier deals, e.g. Liverpool’s £25 million kit deal with Warrior is more than twice the amount received from Adidas and is about the same level as Manchester United, Real Madrid and Barcelona. United themselves are in discussions to extend their deal with Nike, looking for an increase of at least £10 million a season.

Merchandising, retail, hospitality and overseas tours can all swell the coffers, but the Holy Grail for football clubs is stadium naming rights. The only club that has (reportedly) inked such a deal for a meaningful sum is Manchester City, as an element of their long-term Etihad sponsorship, while clubs like Chelsea have to date failed to secure a deal, despite many years of searching.

Many have expressed scepticism over City’s Etihad deal, including Liverpool’s owner John W Henry, who asked, “How much was the losing bid?” and Arsenal manager Arsene Wenger, “If FFP is to have a chance, the sponsorship has to be at the market price. It cannot be doubled, tripled or quadrupled, because that means it is better we don’t do it and leave everybody free.”

UEFA tackle such deals by assessing whether they represent “fair value” and then deducting any excess (not the entire agreement) from the club’s income for the purposes of the FFP break-even calculation. Given the rate of change of such sponsorship deals, my view is that they are unlikely to exclude this deal.

"Arsene Wenger makes his point"

If they do, the lawyers will be out in force, asking UEFA to also look at other clubs, such as Chelsea’s sponsorship deal with Russian energy company Gazprom, who bought Roman Abramovich’s stake in Sibneft in 2005. Questions could even be asked of squeaky-clean Bayern Munich, where two of the most prominent sponsors, Adidas and Audi, each own around 10% of the club.

Clearly, any egregious attempts to get round the regulations, such as an owner buying £200 million of replica shirts or paying £50 million for a super-VIP executive box, will be thrown out, but, as we have seen, there is still scope for some serious revenue improvement in commercial operations.

There have been some interesting developments that clubs may use to boost revenue, such as Real Madrid’s $1 billion resort island in the United Arab Emirates and Trabzonspor’s plan to build a hydroelectric power station. On the face of it, any revenue from such activities would have to be excluded from FFP, as “it is clearly and exclusively not related to the activities, locations or brand of the football club.” However, the same clause does confusingly allow the inclusion of revenue from non-football operations if those operations are “clearly using the name/brand of a club as part of their operations” with no reference to location. Another one for the lawyers.

UEFA’s hope, of course, was that FFP would act as a soft wage cap, though there has been little sign of this up to now at the leading English clubs, especially Manchester City where wages have surged from £36 million to £174 million in just four years, resulting in a wages to turnover ratio of 114%. As well as recruiting new players, the wage bill is under pressure from better deals for current players (to avoid sales on a Bosman) and bonus payments (which can sometimes end up costing more than the additional revenue from success on the pitch).

Some clubs have spent a lot of time trying to reduce their wage bill by offloading deadwood, but this is easier said than done, given the high wages they tend to be on, leading to cut-price sales or elaborate loan deals where much of the wages are subsidised (raising more questions in terms of FFP).

Although English clubs have high wage bills, they are not actually the highest in Europe, an “honour” that belongs to Barcelona and Real Madrid. A root cause of the Italian clubs’ problems with FFP can be seen with the bloated wage bills at Milan and Inter, hence the release of so many experienced (expensive) players in the last two seasons. However, it is difficult to compare across countries because of differing tax rates, which mean that clubs in England and Italy have to pay higher gross salaries for their players to receive the same net salary.

Given the prevalence of third party ownership in many countries, there is a risk that a club’s overall wage bill could be massaged by a sponsor paying part of a player’s package. This is addressed in the FFP guidelines, but it might not be totally straightforward for UEFA to identify any such arrangements.

The impact of transfer fees on a club’s accounts is not easy to understand for many non-accountants, as the full expense is not booked immediately, but instead is written-down (amortised) evenly over the length of the player’s contract. The reasoning is that the player is an asset, but could potentially leave for nothing at the end of his contract on a Bosman, when the value would be zero. So, if a club like Chelsea signs a £40 million player on a four-year contract, the annual amortisation is £10 million, i.e. £40 million divided by four years. Incidentally, the accounting treatment is the same regardless of when the cash payment is made (all up front or in stages).

In this way, a club’s accounts will not show the full extent of major transfer activity immediately, though it will be reflected in growing player amortisation. This can be seen very clearly with Chelsea, where amortisation rocketed from £21 million to a peak of £83 million after Abramovich’s initial burst of expenditure, but then fell to £40 million after the taps were closed. Manchester City’s 2010/11 amortisation was £84 million, but they would hope that this would fall after their recent parsimony.

It stands to reason that wealthier clubs can reduce their annual amortisation by signing players on longer contracts, but this can also be achieved by extending player contracts. For example, if our £40 million player were to extend his contract after the first two years of his initial four-year contract by a further two years, the remaining £20 million valuation in the books would then be amortised by the new four years remaining (original two plus extended two), leading to annual amortisation falling from £10 million to £5 million.

The impact of third party ownership should not be underestimated here, as it enables clubs in many countries, notably Portugal and Spain, to acquire players at a fraction of their total cost. This places Premier League (and Ligue 1) clubs at a disadvantage, as they have outlawed this practice, so they have lobbied UEFA to adjust the FFP rules to take this into consideration. Apparently, they have agreed, but it is not clear how this will work in practice.

Returning to the intricacies of player trading, it is also important to note how clubs report profit on player sales, which is essentially sales proceeds less any remaining value in the accounts. This means that a club can potentially book an accounting profit on sale even when the cash value of the sale is less than the original price paid, e.g. if our £40 million player is sold after three years for £15 million, then the cash loss would be £25 million, but the accounting profit would be £5 million, as the club has already booked £30 million of amortisation.

Up to now, this has surely only interested accountants, but it’s become very relevant for FFP. Furthermore, any players developed through a club’s academy have zero value in the accounts, so any sales proceeds represent pure profit.

There are other angles addressed by the new regulations. For example, many clubs these days have an intricate inter-company structure and there were fears that a club might argue that the football club itself was profitable, while large expenses such as interest payments were paid out of a different company. Clearly, that does not make sense to any reasonable man and UEFA have caught that one, “If the licence applicant is controlled by a parent or has control of any subsidiary, then consolidated financial statements must be prepared and submitted to the licensor as if the entities were a single company.”

"Our finances are special"

On the other hand, the exclusion of non-football operations might benefit clubs like Barcelona, as they would presumably deduct the losses made on other sports, such as basketball, handball and hockey, which amounted to around €40 million in 2010/11.

Clearly, the introduction of FFP will not be without difficulties with Platini himself admitting, “It is not easy, because we have different financial system in England, France and Germany.” Just one example is the £167 million paid by the Premier League in parachute payments, solidarity payments and football development, which might be treated as £8 million of (allowable) charitable deductions for each club if they were not top-sliced from central payments.

Although the FFP regulations explicitly state that adverse movements in exchange rates will be taken into account, it is not explained how this will work. This is important for English clubs, as the weakening of the Euro means that any Sterling losses will be higher in Euro terms than when the rules were first drafted.

While the majority of clubs are in favour of FFP’s attempts to tackle football’s economic woes, there is a concern that far from making football fairer, all this initiative will achieve is to make permanent the domination of the existing big clubs: survival of the fattest, if you will. The argument goes that those clubs that already enjoy large revenue (like Real Madrid, Barcelona, Manchester United and Bayern Munich) will continue to flourish, while any challengers will no longer be able to spend big in a bid to catch up.

In almost any business, you have to invest before the revenues start flowing and in football this means brining in new players and paying high wages in a bid to reach the lucrative Champions League. Critics have asked whether there really is any difference between contributions from wealthy owners and corporate sponsors. This is one of the reasons why the Premier League has reservations with chief executive Richard Scudamore saying that he was opposed to any limits being set on the ability of owners such as Sheikh Mansour to invest money in their clubs.

In any case, UEFA have now announced a sliding scale of sanctions for clubs that breach FFP rules, which works like this: a warning, fine, points deduction, withholding of prize money, preventing clubs from registering players for UEFA competitions and ultimately a ban. This implies that a ban is the last resort, but UEFA has recently banned two Turkish clubs, Bursaspor and Besiktas (suspended), AEK Athens and the Hungarian club Gyori for FFP breaches. These decisions were backed by the Court of Arbitration for Sport (CAS).

"Qu'est-ce que c'est, ce FFP?"

UEFA were also given some comfort by the European Commission’s confirmation that there is consistency between FFP and EU State Aid policy, though this has not been fully tested in the courts. There is still plenty of scope for a powerful club to pursue a competition law case, if it was banned

Some have questioned whether the regulators will have the bite to go with their bark. Expelling teams from the Champions League works fine on paper, but would UEFA really risk damaging their main cash cow? If, for example, they banned Manchester City, Milan, Inter, PSG and Juventus, they would risk killing the goose that lays their golden egg and increase the prospects of a European Super League.

Indeed, key proponents of FFP have expressed doubts over UEFA’s willingness to act, such as John W Henry, “The question remains as to how serious UEFA is regarding this. It appears that there are a couple of large English clubs that are sending a strong message that they aren’t taking them seriously.” Even Arsene Wenger admitted, “UEFA want to create a situation where clubs with deficits cannot play in the Champions League, but I question whether they will be able to force it through.”

"Hulk hears of an incredible deal"

That said, UEFA’s credibility would be severely compromised if a major club that was in breach of the rules was not effectively punished. Listening to public pronouncements, they have consistently said that this will not be the case. Only last week, Platini was unequivocal, “We are never going back on Financial Fair Play. I want the clubs to spend the money they have, not the money they don’t have. We will be enforcing these rules.”

It’s certainly an interesting challenge for UEFA, not least with the arrival on the scene of big-spending Paris Saint-Germain and Zenit St Petersburg (who this week splashed £64 million on the Brazilian striker Hulk and the Belgian midfielder Axel Witsel), but, as we have seen, they have cleverly built a fair bit of leeway into their regulations (and sanctions), so the vast majority of clubs should be just fine with FFP, particularly those in England.


  1. Excellent reading as always, and a piece on FFP that well exceeds anything I have read (and probably will read) on the subject in the English press.

    Interesting to see what will happen to the big two in Spain if the TV-deals are common like in England, and if PSG is non-compliant in 2015. Will Platini take action then?

    1. They'll be fine tbh. Real make more in non-TV revenues than Arsenal or Chelsea do in total and any collective deal will still be skewed like in England and Italy plus collective rights bring in more since there is more value in the whole than the sum of its parts. Combine CL and other non-league TV cash (€40n I think) and I'd guess their revenues would be around the €400m, maybe higher for Real.

    2. "collective rights bring in more since there is more value in the whole than the sum of its parts"
      I don't believe that this is always true. In leagues where there are only two or three clubs that draw major audiences, I can easily envision a situation in which individual deals could equal or exceed the value of a collectively negotiated agreement. France would be an interesting case study: PSG and l'OM (and to a lesser extent, Lyon and Lille) are the show. I wonder if Al Jazeera would have paid more than €30m/year for the right to only show PSG's matches internationally.
      That being said, I agree with you that Real and Barca generate so much revenue that a possible reduction of their domestic TV take will not make much of a difference.

  2. Hi, please can you provide me the link to sources esp. for match day revenue, wages figure. I'm keen to see have a look at the reports. Many Thanks for the help.

  3. Can't wait to read it, looks like an amazing article, like always!

  4. I feel more informed now, and disappointed with the Leeways and loopholes.

  5. Great report.

    When you're talking about wages you say that Italy and England have to pay higher tax bills. I had heard that the Beckham law has been repealed and that Spain has hiked their top tax rate, so this could have a nasty impact on La Liga's big two's tax bill.

  6. Rather excellent. Thanks.

  7. FFP is completely futile. Once you start fixing the loopholes, you end up with nothing:
    - it hugely favours Premier League clubs, as it has by far the highest TV revenues. This is clearly unfair to Italian or German clubs, let alone Portugese, Dutch, Belgian, Rumanian, take out TV income.
    - Sponsorship distorts hugely, there's no meaningful difference between Qatar paying Barcelona 24 mio for their name on a shirt and Qatar injecting X mio in PSG. So logically, for commercial income: take it all out.
    - so if we take out equity injections (blatant or by stealth as "membership fees"), debt injections, commercial income and TV money to level the playing field, all we end up with to evaluate FFP is gate attendance and profits from player trading.
    - Oh yeah, player trading can be moved off-balance sheet by means of players being owned by external investment funds - take that out as well: just consider wages then.
    - Then the argument logically goes that it's unfair that some clubs have richer fans (the "prawn brigade"), the sport clearly wants to present an egalitarian/non-elitist image, so after adjustments for that, you'll just be counting heads in stadiums to determine how much a club is allowed to spend on player wages. Woohoo.

  8. Great post as usual, it's so clear and complete, something impossible to read on an Italian newspaper...thank you!

  9. UEFA has apparently taken a stance and added a section about third party ownership in the 2012 edition of the Financial Fair Play Regulations. It's in Annex VII (C)(5)(b)

    «Any profit in respect of a player for whom the licence applicant retains the registration must not be recognised in the profit and loss account. For the avoidance of doubt, any profit arising from the disposal of economic rights or similar of a player to any other party must be deferred, and a profit can only be recognised in the profit and loss account following the permanent transfer of a player’s registration to another club.»

    To be honest, it's really a soft change and it hardly changes the disadvantage for clubs in the Premier League and Ligue 1. Even though third party ownership is an integral part of for example the Liga ZON Sagres; it can't be beneficiary to have agents such as Mendes(GestiFute) sitting on several sides of the table in transfer dealings.

    And great article by the way. I was considering writing a lengthy one about the topic, but it would seem it would be surplus to requirements now …

  10. Clearly, Manchester City will have almost no hope of meeting the FFP regulations, despite reducing their transfer expenditure this summer to a net £30m or so.

    What is more surprising is that Chelsea seem to be almost able to meet FFP rules, although that doesn't take this summer's high net transfer spend into account.

    This season is already the second year of the first qualifying period for FFP. Yes, the Premiership money goes up dramatically but not until next season.

    1. Due to the age/length of contract of the players chelsea have signed they will be able to write down the transfer fees significantly

    2. One of the core reasons that the chelsea story looks healthy prima facie is because of sheer revenue brought in.... In 10 years they have been to 3 CL finals.. 2 semi final exits and roubd of 16 every year... That is a lot of dosh.... Even this year with funds from cl and pl...the transfer bill of chelsea is well taken care off.. What remains is balance expenses against match day revenue and other revenue.... Thats very smart and healthy business.

  11. good stuff, i'm a big fan of FFP

  12. Fantastically clear and thorough analysis, as always.

  13. Fascinating stuff. I am all for Financial Fair Play but it seems that, like doping, the 'bad' guys will always be one step ahead. It also seems that UEFA will deal with potential problems but hasn't got a clue how.
    For instance, I just cannot see how PSG can be a fair player. 140 million euros spent in the last few weeks, revenue which is far far far below those figures, TV revenue which is a fraction of the English deal, commercial revenue light years behind the English and Germans, and player wages which are just ridiculous. Take Ibrahimovic: his wages are 14 million euros net, whatever new laws the government comes up with. Which means that if our President new 75% tax comes into play, PSG will have to fork out anything between 50 and 80 million euros a year for one player! That is twice the whole budget of many french teams (including Montpellier, current champions).
    I just cannot see this how the club can survive without massive influx from Qatari money, thus not following FFP rules.

    How can UEFA say whether a sponsorship deal falls within its rules or not. A couple of years ago, a 20 million pound shirt deal would have been ridiculous, now, with Man Utd, you can double that So what's the limit?

    I really do not know what the best deal is for European football, but I still expect the bubble to burst. 50 quid for a ticket for a football game, 50-70 pounds for a TV package to watch football, 100-200 000 pounds a week for many football long will this last...Champions League necessary for many clubs but only a fraction can qualify for it every year...
    Good for Platini to try and make things better. Good luck to him!

  14. Chelsea to comply!

    this is great news!!! AND we are yet to add CL win bonus to this budget.

    Thank you Swissramble, and thank you CFC for putting up wage structures so clearly.

  15. "some clubs might simply make operating losses every year and get within the break-even target by hefty player sales in one year": sales to whom?

  16. Fred, your comparison with doping could not be more relevant. As you say, the 'bad guys' always seem to come out on top (at least until they are caught out many years later as in the case of Lance Armstrong).

    However, in the case of football, the case is that they are not found out many years later but that they defy the authorities, in this case UEFA, to sanction them in the first place!

    It is clear that PSG, City, Chelsea and Russian clubs such as Zenit St. Petersberg and Anzhi Machkachkola lose so much money each year that they can only survive financially by means of a very large input of funds from their owners.

    This input is way in excess of the amount allowed by UEFA, namely €45m over the two years 2011/12 and 2012/13 combined.

    Will UEFA have the balls to ban these clubs from European football? That remains to be seen, although it is certainly easier to ban them than banning, say, AC Milan, Inter Milan or Juventus, clubs which are also affected as they run at huge losses.

  17. I'm a Milan supporter. I think FFP is a good idea, but will have plenty of perverse outcomes.

    Think of Milan's pursuit of Montolivo and now Yanga-Mbiwa.

    In both cases the players both had one year left on their contract when Milan started to chase them. In both cases Milan offered low-ball transfer figures, which allowed them to negotiate for the player without risking getting in trouble for tapping up.

    Clearly in Montolivo's case and it looks like in Yanga-Mbiwa's case too, Milan have done some gentlemans agreement with the players to make sure they wait out their contract and come as free agents.

    I'm sure we will see more of this because of FFP. I wonder what UEFA can do to stop it. Doesn't seem to be within the spirit of the game, but clubs under pressure to meet FFP are going to do all kinds of didgy stuff to get by

    1. Surely waiting for a free is not in the interests of the club who could sell the player meeting FFP req's

  18. I have not yet had a chance to read through your FFP article in full (a fine read I expect to be sure!). However, it is very interesting that the FA yesterday has finally presented a discussion for an FA, ie domestic, regulation of salaries through the imposition of some sort of salary cap in the english game.

    This is something that has existed in the US for a long time. The workings of it I understand are complex, but the consensus is that they manage to achieve a greater competitive balance between teams by limiting each club's ability to spend on salaries or rather to force them to allocate salaries within strict confines (you can spend it all on a few ronaldos at the expense of the rest of the team).

    Do you have any views on whether such a system is necessary in addition to UEFA's FFP or indeed whether it would be redundant to it? I'm doing my own thinking on this, and especially I am interested in your views as to whether these rules would cause the English game to lose its competitiveness domestically and at EU level if other EU markets would not follow suit.

    Clearly this may cause a drain of talent from the inability to offer the highest salaries relative to other markets (eg we cant think Barca or Real would allow themselves to lose that marketing edge of attracting the worlds best if the salaries couldnt follow), and would this ultimately damage the English teams' chances to succeed in the CL (though obviously their ability to participate would not be affected)

    It seems to me that it would and that this would only lead to the financial strengthening of those leagues unbound by salary caps perpetuating their financial advantage and potentially worsening the talent drain from England (noting this might in turn cause domestic players to be favoured and improve the England squad in exchange; this is what happened in France but without Salary caps merely the low capitalisation of the french teams until recently).

    Ultimately I guess what I am saying is that since there doesn't appear to be sufficient market pressures to ensure competitive equity, must the dreaded pan european EU regulation take over the finances of European football since UEFA has not such authority?

    Some rambling thoughts but as an Arsenal fan ever frustrated (as Valencia, Atletico, Ajax, Dortmund and other similar fans) by seeing the pressures from subsidised teams draining our best assets, I am keen to know when and in what form an effective and fair solution will ever exist.

    1. LeGooner

      My opinion on this matter is that the FA need to have a control in place to ensure its member clubs don't fail to meet their obligations. It would be very embarrassing to have a member club fail to qualify and could put the premier league / FA under a need for close controls or examination. Otherwise it's a bit like a construction company not having a health & safety department...accident waiting to happen.

  19. Is there anything to stop someone investing say £500 Million in a league one or two side in the hope of gaining quick promotion to the Premier league so that that money is already there over 3 years if they make champions league qualification?

  20. Brilliant as always, what I really wonder is how serious UEFA will bee about punishing teams.

  21. well presented, love it cos it reads like the idiots guide to financial fair play and i mean that in a nice way sadly its the content that is most disappointing as there are way too many grey areas open to exploitation by smart people working for wealthy clubs for stupendous money thats gets even more stupendous if they are succesful in doing the clubs bidding. The whole thing smells of UEFA feeling changes need to be made and then asking the big clubs what the changes are and how they should implement them and then shaping the whole thing to suit the big clubs differing needs. In short it sucks basically because UEFA cannot and truthfully dare not bite the hands that feed it and keep it in such privilege, luxury and splendour. UEFA are like a narcissistic, pampered and privileged trophy missus on the arm of a famous, rich international celebrity happy to parade said guy at lavish parties she's arranged while knowing she's nothing without the guy and then having to tell the guy how to conduct himself all the while hoping he doesn't get the hump. Uefa can only beg the clubs who make their beloved champions league so prestigious to please comply by their rules, please pretty please.

  22. I've wondered if some of the recent spending spree, particularly by City and Chelsea (or more recently by Zenit), has been an attempt to get assets on the books before FFP kicks in. Buy Hazard and Oscar now (or Kun and Nasri last year), and at least some of their cost will be amortized in the pre-FFP window. Then if you sell them, the sales can offset future purchases. It's akin to clubs buying large stockpiles of gold before they have to break even. Then they can just sell some gold if they need to generate revenue to break even once FFP exists.

    1. Idiots like the author and Frank don't realise that Manchester city no longer needs to spend, by season 2013 when all clubs in europe have to have the laundry neat and tidy. Manchester City will have no debt what so ever to hinder the club.

    2. This is brilliant, as you have, in fact, revealed yourself to be a genuine idiot for two reasons:

      1. Despite explaining how FFP works in almost painful detail, you are obviously too thick to realise that FFP has very little to do with debt, though I suspect that you actually don't know the difference between debt and losses.

      2. If you had bothered to read some of my past posts on Manchester City, then you would know that I have written quite positively about Manchester City's project and indeed their controversial Etihad sponsorship deal.

      However, I would like to congratulate you on your efforts to embarrass yourself. I'm not sure you could have done a better job.

    3. Why do hard-line supporters often think that you are writing against their beloved clubs? I think you are one of the most reliable sources of information, you explain the facts and figures better than most. If everything you wrote were to please everyone, no doubt the info wouldn't be very reliable.
      If one doesn't agree with you, fine, they can just explain why. That would lead to a debate and everyone would move forward. Criticising for the sake of it isn't very fruitful, is it?
      Go Swiss!!

    4. without reading back through your blog, what is then stopping a club borrowing money to cover a loss?
      say a club like mancity has a loss of 40m fy2012 and 20m fy2013, do they simply borrow the 15m to cover the allowable loss?
      what if manu didnt make cl next year, that coupled with a low share price could drive their investment down and potentially inhibit their re-growth plans should that happen.
      also, i dont understand why there are clubs not in the cl supporting this. dont they realise that it is creating a superleague of untouchables? as without cl revenue, you need investment to buy players and if you do this for 4 or 5 years then finally crack it into the cl you will face sanctions, when all you are trying to do is improve as a club. the evertons, aston villas, newcastles etc. can look at cl as only a pipedream these days, yet this is called fair play!

  23. Looks like piece of very good work. Thanks. I'm starting to read.

  24. What are the sources for Bayern Munich's incredibly high commercial revenue? I know it has something to do with the Allianz Arena, but what exactly?

    1. Bayerns commercial revenue breaks down roughly like this: 80 mio sponsors, 40 mio merchandising and 40 mio Allianz Arena. Not sure what exactly makes up for the Allianz Arena part, but I believe rent (mostly from 1860 Munich), sponsoring again (from Allianz mostly) and catering.

  25. Simon, Uefa's FFP rules already apply and have applied since the start of last season! The first review of these two years starts next year and, in principle, can determine eligibility for European football the following season 2013/14.

    This summer, City's transfer spending was relatively restrained at least partly because FFP already applies but what they spent last year is included for FFP review next year.

    City can't meet Uefa FFP rules and it is hard to see Chelsea, PSG, Zenit or Anzhi Machkachkala doing so either.

    1. Keep dreaming dumbo, the FFP don't actually kick in until 2013. Clubs of all leagues were given three years to get their laundry in order, by 2013 Manchester City will be entirely out of debt.

  26. What a load of bollox, the FFP do not kick in until 2013. By then Chelsea. Manchester City and Liverpool will have wiped their debt clean, unlike clubs like Man United who are in over £300 million debt.

    You idiots need to stop with the wishful thinking, we all know you're praying the FFP hinders Manchester City but in the real world it will never happen.

    Deal with it Gimps!

    1. CityBlue, both Swiss Rambler and I have explained to you that the Uefa FFP regulations have already 'kicked in' - from last season, 2011-2012, in fact!

      The second season of the FFP is this season, 2012-2013, and the results of these two seasons are then judged over 2013-2014 so that the start of the 2014 season is determined by what has happened last season and what happens this season (financially speaking).

      In the season 2010-2011 City lost almost £200m (admittedly, they shunted some of the following seasons' losses, to the tune of £30m +, into that season, the season BEFORE the commencement of FFP).

      City recognised that they had to do whatever they could to avoid falling foul of FFP. For your information/edification, FFP has nothing to say about debt. After all, if you can afford to pay off your mortgage, it doesn't matter how much your mortgage is!

      Utd's 'mortgage' is pretty high but, importantly, is manageable from Utd's own revenues - Oh!Are you aware that the Premier League clubs are now discussing a plan to limit the ratio of wages to revenue to no more than 70%!

      Utd's ratio is under 50% and City's is 114%!

  27. By the time 2013 comes around Manchester City will have wiped their debt clean, same can't be said for £300 million in debt United.

    1. City have no debt, these rules do not punish debt hence the popular belief these rules are intended to protect the established brands of world football. It punishes those who spend more than they earn, even though this is common practice in nearly all forms of business ("speculate to accumulate"). City are thus troubled as they aren't part of the G-14 cabal these rules are made to appease but I believe they will manage, they have some of the smartest business minds in football around and the addition of Ferran Soriano is a masterstroke, he has done it before at Barcelona and has many friends in the corridors of power at UEFA.

  28. City may or may not meet the FFP requirements but the trend will clearly be in the direction which UEFA want so I doubt they'll do much more than apply the first level sanctions if any.

    Perhaps after it's all in place they'll have a go at clubs which retain very high levels of debt.

  29. 1)So, have Arsenal gone about it the wrong way paying for the new ground with player sales and outdated sponcership deals when the cost of the debt on the Grove is weritten off as investment?

    2)can't rich clubs just sell each other players for inflated sums, effectivaly not spending muchbut keeping the top players in thier privet rich club?

    3) if the sum payed for a player is spread over the contract for the buying club, then is the selling club also allowed to register only that part of the sum that each year?

  30. I agree with Ignacy Pasikonik. This is really good work

    1. Well, it is certainly thorough in a predictable format kind of way but it fails to highlight the most important points in a readable manner. One is left with the impression of looking at impressive wallpaper.

  31. Great stuff as ever Kieran but can I point out one widely-held fallacy in your article. The concept of applying 'fair value' to a commercial deal only applies if a 'related party transaction' is involved. This is a well-established reporting requirement that requires companies to report transactions with individuals or companies that have some element of 'control' (again an established concept) over either the reporting party or the other party to the transaction. So if a director of a club secures the use of an executive box, lends the club money or does a sponsorship deal involving another company he controls, this has to be reported along with the key facts of the deal (i.e. whether it's at normal commercial rates or not).

    Whatever people may think, Etihad is not a related party to Manchester City FC as there is no common control. If there was, Manchester City would have had to report it in the previous two years accounts. They sisn't so they are happy it wasn't classed as such. All the talk from UEFA about investigating it, is just hot-air.

    In addition, despite all the assertions otherwise I understand that City are quietly confident of meeting FFP, although the first licensing period might be a bit tight. They should be able to use the provision allowing the add-back of wages paid to players under contracts signed pre-1/6/2010 to scrape in. Even if they don't, they will be able to demonstrate to UEFA that they are on course to comply over the short term.

    From then on, it will be a lot easier, as revenue will grow (new kit deal announced plus other commercial sponsorship deals in the pipeline) and player amortisation decline, as the contracts for key players signed for large fees are either renegotiated or the players are sold.

    1. Thanks for that constructive feedback.

      Unfortunately, even in a piece as long as this one, I cannot go into detail on every specific issue. However, I have addressed both of your points in previous articles.

      You're absolutely correct that the first test for a fair value deal is whether it is a related party transaction. I covered this in a piece in July last year on the Etihad deal, which you can find here:

      Similarly, I outlined how City *could* possibly meet FFP in a piece last December, which included reference to wages for players signed before 1 June 2010, revenue growth (including Champions League money as well as commercial increases) and a reduction in player amortisation. Whether all of that is sufficient or whether City have to rely on some goodwill from UEFA, we shall see. That piece can be found here:

    2. An excellent article as usual.

      I guess you will be doing a new article on City when the accounts are published at some point in October. The guess by the more astute City fans is the City will fail FFP criteria by somewhere between £65m and £85m this season and around £25-£35m the following season. A good 60% of the failure being due to the effects of player amortisation.

      BTW - Most of the decrease will be from an increase in commercial revenue. However, the recent Silva deal is a sign of things to come - long contract extensions for team players - for though his salary goes to near £200k a week if City are successful it remains at £120k if they are not successful. It will also improve City's short term FFP position over the next two years by reducing his component of the amortisation 'loss' by more than his salary increase.

  32. Question, could Abramovich go and buy Chelsea a new bigger stadium, outlay the money himself so no debt to the club and then inject the sale of the current stadium/land into the clubs funds, would this be allowed?

    1. He can simply inject new equity capital sufficient to buy a new stadium. This would not be a profit and loss account matter.

      The question is whether he would want to put in another £500m into the club as he seems to have already put in about £700m.

      But then again it was never really his money but that of the Russian people.

  33. Excellent piece, Swiss.

    We thought that City and/or Chelsea and/or one of the Italian power (in the face a really tough economic issues) might be the test case for UEFA's willingness to enforce FFP firmly. But Zenit and PSG seem to have lapped them.

  34. PSG proudly presents the loopholes of UEFA FFP:

  35. Another enlightening entry. Can I ask what is meant by "Asset values" in the plusvalenze table?

  36. Splendid article. Could you please share your sources as well? :)

  37. Great article linked to @ to enlighten the dim !!


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