Playing by the rules. . . but which ones?

Monday 22 August 2011

From the beginning of June this year, new rules came into force that radically alters how football now operates. A tough-talking initiative, Financial Fair Play (FFP), is designed to crack down on debt-laden clubs or controversial practices.

The effects of this are already being felt. Manchester City’s new sponsorship deal with Abu Dhabi’s flag-carrier airline Etihad, reportedly worth £400m, will now be analysed by UEFA’s FFP boss after claims that this is an attempt to circumvent the strict new financial rules – critics highlighting shared Abu Dhabi links between City and Etihad.

City have declined to reply to these allegations, although the club has previously said speculation over the figures was “not accurate”. Nonetheless, this highlights the impact of new FFP rules, and the current transfer window is the start of a three-year plan to level the playing field for the 660 top-division clubs throughout Europe.

UEFA general secretary Gianni Infantino claims there is unanimous agreement for the new rules. As an initial compromise, for the next three years clubs will be able to record maximum losses of €45 million (£39.5m) in total which can be subsidised by an owner (but only if they invest the money permanently in return for shares, not by lending it, as Roman Abramovich did when he first took control of Chelsea). If owners are unable to subsidise debts, the maximum loss allowable is €5m (£4.4m).

From 2014 to 2017, the overall permitted loss will fall to €30m (£26.3m). After that, UEFA hopes clubs will have learned the art of financial balance and be genuinely breaking even. If they have not, exclusions from UEFA competition may be the penalty.

The task may not be as easy as UEFA would like to think. Available figures suggest that around half of Europe’s top-flight clubs did not break even in 2009, and many are sceptical over how rigidly the rules will be enforced.

If the likes of Manchester United or Barcelona do not do enough to meet these new demands, will UEFA actually be willing to exclude such big-name teams from Champions League competition?

Of the ‘big five’ in the English Premier League, only Arsenal would comfortably meet the requirements of FFP based on recent financial results. Manchester United, Chelsea, Liverpool and Manchester City would all fail.

There is, however, the possibility for restrictions to be avoided or ‘managed’ in a number of ways. Depreciation on fixed assets is not included in the FFP calculation, while money spent on youth development, stadium alterations and community projects does not count either, so a club like Chelsea – who are estimated to spend £10m annually on their youth set-up and could feasibly claim £9m in depreciation – could instantly reduce their last annual loss of £71m by more 25%.

Another factor is the simple reality that transfer fees do not automatically show up as an annual expense as they are often paid in instalments over the course of a player’s new contract – as with Fernando Torres and his £50m move to Chelsea. The total cost would not count as one lump payment, but would instead be broken down into a number of smaller yearly payments.

Even if a club misses the break-even target, until 2012 it can still be granted a licence if its financial losses are seen to be improving, and the over-spend is caused by the wages of players that were contracted before June last year (when the fair-play rules were approved).

To cast the spotlight back on Manchester City, football finance experts note that a loss of £121m last year does not bode well for the stated demand of breaking even within three years, but if they were to generate even more commercial income – which last year had doubled to an impressive £52.8m – they might be able to achieve this.

However, because the club’s sponsors are seen to be predominantly linked to the owners through regional proximity or Abu Dhabi government connections, some have claimed that clubs such as City can bypass FFP rules through the likes of sponsorship, although UEFA insist all such deals will be market-tested.

Taken as a whole, the new FFP rules will impact heavily on the future of football. By limiting overspending, UEFA have effectively introduced a wage-cap by stealth, while lower-league clubs will no doubt feel the effects of ‘the law of unintended consequences’, with a variety of factors likely to pose new challenges for them.  Will they, for example, be able to demand as much money selling their best players to top-flight teams in future?

One central point however is that clubs should be wary of trying to flout the rules in ‘clever’ ways. If the FFP panel feel the new regulations have been violated, UEFA claims they will be serious about clamping-down hard – whoever the perpetrators might be.