Monday, 10 June 2013

Financial Fair Play

Financial Fair Play, or FFP as it is becoming referred to is going to become more and more important over the next few years. Following a post by my fellow blogger at Wrong Side of the Thames I found myself having a read of the Football League website that explains the rules and, more importantly for my purposes, the sanctions that failure to comply will bring about.

As we all know football in this country has become more and more expensive, as a business, since the rules to make stadiums all seated. The initial cost of this change was massive and all clubs underwent major redevelopment or moved to alternative stadia and sold their current one to help finance the move.

Clearly there are a few clubs that have looked for cheaper routes to comply with the new rules and regulations and literally put seats on open terraces, but the majority of clubs have modernised their home grounds to make the modern day football experience unrecognisable to the 70s and 80s.

This change, that I think, personally, is for the better, has used vast sums of money to take football into the twenty-first century and secure its future. However, many of the clubs have funded these developments via loans that some nineteen years after the deadline for conversion are still not repaid in full.

There were many grants, and some sponsorship, but on the whole football has funded this change by itself. One of the major changes to football income has come in the form of TV revenue - Sky Sports, in particular. I am not going to debate the rights and wrongs of the TV deals - those conversations have been done to death both on this blog and others, but the money raised has, in part, funded the changes to the stadia that we benefit from today.

When I say in part I mean that there has been much more money available. Clearly the Premier League teams have taken the lion's share of the money, and those teams have much better (and bigger) stadia than those in the lower divisions. The surplus money has tended to end up in the pockets of players and their agents. Again nothing new, but the main driver for the FFP regulations.

I suspect that football clubs have always tended to lose money. The difference was that those sums of money were much smaller relative to other industries and businesses when the income in the sport was less. I have done no research but if we assume that the average football club turned over less than the average local business it was always possible for a new local businessmen to come in and bankroll the club for a few years before passing the torch on to the next one.

Thus a football club in crises could be saved by one of, probably, dozens of local businessmen that could be persuaded to throw a few quid at it for the prestige that comes with being a Football Chairman for a few years.

When the Sky funded Premier League launched those days were numbered. It seems incredible, now, to think that the initial Sky deal (in 1992) was £305m over five years. Breaking that down (with 22 teams in the Premier League) it meant an average payment of £2.77m per club. Even that made the top division so much richer than the rest that it created an unlevel playing field, financially, with the Football League. £2.77m added to the turnover of even the poorer clubs in the Premier League took them out of the reach of virtually all local businessmen.

As we all know the new TV deal guarantees the bottom team in the Premier League c. £65m next season. Staggering!

During the rises in the TV money that we have seen over the 21 years of the Premier League the kind of money required to buy and/or bankroll clubs has just ballooned. Add to that the billionaire owners that have way too much money to ever have to worry about running out, and a habit of getting everything that ever want, and it is no surprise that most of the football clubs in this country and unsustainable without capital injections - or periods of administration.

The subject of administration is one that I have a passion about, but this is not the place for that. I have written about it before, however, and you can read it here. All I will say is that Portsmouth should never have been allowed to carry on trading, Palace should never have been able to acquire Selhurst cheap when settling their debts with 1p in the £ and Southampton should never have been allowed to go on the spending spree they did, after they wiped off the total debt that they ran up building a new stadium for £32m.

So if we assume that we are going to, eventually, run out of multi-millionaires to wipe off huge debts, and that HMRC (and the Government) are going to stop football clubs from knocking tens of millions of pounds and carrying on as though nothing has happened something needs to change.

I have skated over the financial drain caused by players wages and agents fees as it is common knowledge, but it is clear that with most football stadia now up to standard the major area that needs tackling is players and agents remuneration.

Salary caps are unpopular, and probably unlawful, so the clubs need to be forced to reduce their spending in total. This will be tackled by FFP differently, based on what division the club is in. As we are in the Championship this is what I decided to read about. I discovered something that tempted me to write this.

Sadly I have probably been waffling on for so long that many have given up reading, but if you're still with me then hold on as I'm getting the interesting bit.

The rules allow for reducing amounts of 'loss' and 'equity investment' that are, combined, £5m by season 2015/16. The numbers are a little irrelevant as they are still to big for anything less than a multi-millionaire to fund them. However, the sanctions are very interesting.

The sanctions don't apply until 2014/15 but then they are different based on promotion or relegation. If the club is in the Championship then a transfer embargo applies until they comply with the FFP rules. This could, potentially, run for several years. In the event of relegation to League One the club would have to satisfy the rules for that division (which I'm not going to discuss) and would not benefit from the money in the pot raised from the Fair Play Tax.

The Fair Play Tax (which may or may not be referred to as the FPT) is the most interesting part of the whole thing.

Basically if a club fails to satisfy the FFP rules in the championship and is then promoted to the Premier League - a likely scenario, they would be hit with a fine. Clearly there is little point fining clubs that are losing too much money as they wouldn't be able to pay it, but with a bumper Premier League TV deal on winning promotion these clubs are fair game.

The fines would be as follows:
1% of the excess overspending between £1 and £100,000
20% of the excess overspending between £100,001 and £500,000
40% of the excess overspending between £500,001 and £1,000,000
60% of the excess overspending between £1,000,001 and £5,000,000
80% of the excess overspending between £5,000,001 and £10,000,000
100% of the excess over £10,000,000

What this means is that should a team lose £24m above what is allowed and is promoted to the Premier League they would be fined £24m and this would become the Fair Play Tax and would be split among the Championship clubs - £1m each in this example.

Without the financial figures of all the clubs, and bearing in mind that by 2014/15 they will have reduced their costs (we hope) it is difficult to put a value on this, but it will mean that those clubs that gamble on winning promotion could well see a 100% tax on all their spending if they want to go the extra yard to win promotion. Thus a £2.5m player to get them over the line will, ultimately cost them £5m, and, presumably, double the wages that they pay him for the rest of the season.

Where this gets really interesting is with teams that have been relegated from the Premier League. In their first season they would not be subject to the Championship FFP rules so long as they have satisfied their financial obligations under Premier League regulations. However their would be the potential of a Fair Play Tax if they achieved promotion in their first season in the Championship.

What this means (as far as I can tell) is that if a team gambles on going back up in their first season and has a £29m loss (which seems very likely to me if they are used to getting £40m more a season in the Premier League) they will be hit with a £24m fine when they are promoted {I'm using the figure of £24m as it divides nicely with 24 clubs}. Thus if the new TV deal ensures that relegated teams get promoted in their first season down, the Championship clubs are going to get to share a big chunk of their TV money the season they go back up.

This will, I imagine, make it harder than ever for yo-yo clubs to establish themselves in the Premier League (as they will, potentially, have a multi-million pound fine to pay) and it will also be another massive kick in the teeth for any established team that is relegated from the Premier League. An estimate is that a large proportion of the parachute payment will become, effectively, an interest free loan as it will be paid in fines on promotion.

The Premier League have not agreed how these Fair Pay Tax payments will be paid, yet. but I suspect that it will be deducted from the TV money. Either way it does look like 'buying' promotion is going to be very harshly treated.

On the whole the sanctions are justified because unless the overspending is stopped football in this country will be permanently damaged. The super rich clubs don't, actually, care who they beat week in, week out but even though Sky TV believe that there are only really a handful of teams worth bothering about the whole idea of a league system depends on a thriving (or at least a financially viable) set of clubs. Even Sky would struggle to sell subscriptions if we had six teams that played each other six times a season.

There is an argument that every club in the whole league, from Premier down to League Two, should apply for administration at the same time and wipe out all it's debts forever. Clearly HMRC would go mad, but if the clubs stuck together and allowed for liquidated businesses to reform and start in the same division as they were in before, the whole of football would be debt free and the FFP regulations would, suddenly, seem a lot less onerous as no club would have to budget for interest on debts or loan repayments.

Alternatively the footballers are going to have to 'cost' a lot less. I say cost as I'm referring to their wages, their benefits in kind (support staff, cars, houses etc.) and most importantly the agents fees. I'm ignoring transfer fees as they are, to a large extent, kept within the game itself. It is a process that allows the top clubs to pass money on to the smaller clubs. Sadly this is going to be reduced due to the Premier League rules about signing young players and the subsequent closing of academies.

So we should soon see discussions taking place where clubs are telling players that their wages will be massively reduced and reduced further unless the agents waive some of their fee. I can imagine that if a player is told that if he wants his agent to earn £1m from a deal they the player will earn £1m less the agents will struggle to justify their fee to their client. Until now this has been difficult because if the club doesn't agree to what the player (or most likely his agent) wants he will go somewhere else. Once FFP really starts to work there will be a limit on what the clubs can afford to pay and, more importantly, what another club will pay.

There will always be super rich clubs that will pay more than the rest, but that's true of every company with employees representing different talents. However, it is hoped that players wages will become much more sustainable. As much as I've enjoyed watching Ricardo Fuller this season if he was earning anything like the £13k a week that has been reported we paid £676k (well less actually as he wasn't with us for a full twelve months, but you get the picture) which is unsustainable. Realistically I suspect he would not have retired and/or done anything else if those wages had been £3k a week so FFP might not effect the players we watch, they will just cost less.

Already we are seeing players released from Premier League clubs and they will probably still be looking for a new employer towards the end of August. The likes of Carlton Cole, who is 29, being reported as demanding £45k a week to join Stoke a year ago is not deemed to be worth enough to West Ham to even offer him a contract with the potential of getting a transfer fee for him. He is 29, he is far from past it, and with all due respect to him, I can't see him being able to command in excess of £2m a year for doing anything else.

As for Charlton, I can see the trend (as with Carlton Cole) being that better players than we have (or have released) will become willing to sign for a Championship club for less than we have been paying. I would imagine that the Premier League clubs will start to reduce their budget by having cheaper squad players, and the lists of those players that have been released demonstrates this. Very few of those players will retire, and to keep playing they will lower their wage expectations. They will have to!

What we will need to do is lower wages of any top earners. Sadly, for many of our players that means wage cuts that will make a drastic difference to their standard of living, but in truth they (like many following the boom years) have been spending money that was borrowed (all be it someone else was borrowing it) and it has to stop.

I am confident that we will see us signing a few free transfers that would have been thought to have been way out of the price range of a Championship club three seasons ago.

Time will tell but as I've mentioned on this blog before, my greatest desire is to be able to watch Charlton with my son for the rest of my life, and with my Dad for the rest of his. The more financially stable football, and Charlton in particular, is the more likely it is that I will be able to achieve that. Friends, wives, jobs and houses come and go but family and football are constants that stay with you for your whole life. It makes sense to protect those things that you want around you for as long as you live. I think FFP is a great idea and might be the savior of our game, and our club in particular.

Up the Addicks!


Anonymous said...

Interesting post. The trouble with the way football is going is that the money in the PL is so much that sooner or later those clubs will get their houses in order (a number like Norwich, Southampto, even Palace are already now debt free because of the payments), the knock on is that when they are relegated they will have the benefit of huge parachute payments, now lasting 4 years, with no debt to service. This will give them an enormous and potentially insummountable advantage over the Championship clubs contstrained within the new rules and will make the PL a closed shop with teams yo yoing but very few "new entrants".

Unless the PL redistribute TV money more evenly amongy the leagues (which they will never do as they have no insentive to) I see a fairly bleak future in terms of competition in The Championship.

Hopefully I am just being too pesimistic!

Dave said...

Another way of looking at it is that the regulations will reduce overall spending for the majority to affordable levels. However, any club with pots of dosh are likely to gain a bigger advantage over their spending rivals than today if they can afford to pay the financial penalty eg when QPR bought their way out of the Championship, I believe they would have been subject to a £5m FFP tax. Tony Fernandez would probably have seen that as a reasonable price to pay if FFP had reduced the spending that year of his main rivals. It would have handed QPHa an even bigger advantage that season.

Dave said...

Another way of looking at it is that the regulations will reduce overall spending for the majority to affordable levels. However, any club with pots of dosh are likely to gain a bigger advantage over their spending rivals than today if they can afford to pay the financial penalty eg when QPR bought their way out of the Championship, I believe they would have been subject to a £5m FFP tax. Tony Fernandez would probably have seen that as a reasonable price to pay if FFP had reduced the spending that year of his main rivals. It would have handed QPHa an even bigger advantage that season.