Financial losses, potential penalties put FFP's development in a bind

Posted by Stefan Szymanski

In 2009 Michel Platini, the president of UEFA, announced that something was finally going to be done about the arms race in European soccer. With great fanfare it was announced that regulations, known as Financial Fair Play, had been agreed to limit excessive spending, especially by the notorious "sugar daddies" -- wealthy individuals who use their financial muscle to stockpile talent and effectively buy titles. Many soccer fans welcomed the initiative, believing that prudential regulation was long overdue in the light of the persistent insolvency of European clubs.

Four years on and cynicism has supplanted optimism. Since then Manchester City has won the Premier League fuelled by Abu Dhabi's petro-dollars, Chelsea have the Champions League funded by Russian oligarch Roman Abramovich, and Qatari billions have bloated Paris Saint-Germain almost in open defiance of UEFA.

Xavier Laine/Getty ImagesMichel Platinie's FFP announcement was received with open arms, but limits on excessive spending have not rendered the desired effect.

Spending seems to continue unabated, and by UEFA's own admission financial losses at top division European football clubs over the last five years have increased from €0.6 billion to €1.7 billion. In the financial year 2011, 63 percent of these clubs reported an operating loss, and 55 percent reported a net loss overall. Thirty-eight percent of clubs reported negative net equity, and 16 percent of club accounts reviewed contained a qualification expressed by the auditors as to financial viability of the company.

So has UEFA done anything? Actually, FFP is not the only form of financial regulation that applies to clubs. UEFA introduced a licensing system in 2004 which laid down a number of criteria for participation covering areas such as stadium quality and management systems. Every club that appears in European competition must be given a license by their national federation, and thus far 34 clubs have been denied. But mostly, they have been minnows such as Northern Ireland's Coleraine FC or Lithuania's FK Vetra (since 2004 five Kazakh clubs have been punished).

What about the big game? Have they been let off? No, but the regulations that are likely to affect them have not yet come fully into force. The only part of FFP that is currently operational is the "no overdues payable" rule -- which basically means you have to be up to date with your creditors. This year Malaga, a medium-sized Spanish club, has excluded from the Champions League for breaching this rule.

FFP was always going to be a slow burn. The key element is the "break-even rule." Clubs that fail to break even can be excluded from UEFA competitions (the Champions League or Europa League) or penalized in other ways (e.g., having prize money withheld), but the measurement of break-even is complicated. The break-even calculation is based on audited accounting data that clubs must supply to UEFA, to which additions and subtractions are then made (for example, spending on improving your stadium is excluded, but direct subsidies by the owner do not count as income).

The calculation is then based on a three-year average in order to iron out random fluctuations -- hence the wait. Only later this year will UEFA have the three years of data and so be able to decide who is in breach, and what the punishment will be. Decisions are expected to be announced in May 2014, and expect the rest of that summer to be taken up with appeals and legal wranglings.

Carl Court/AFP/Getty ImagesClubs such as Roman Abramovich's Chelsea, which has won a Champions League trophy under FFP, could be tempted to ignore its rules if they believe enforcement isn't likely.

The outcome of this process is still anybody's guess. Given the extent to which UEFA has invested in checking the numbers, one might think that it will be fairly easy just to exclude those who are in breach. The problem is that if too many clubs are excluded, the credibility of the competitions could be compromised. Consider the following -- each year there are about 80 clubs participating in the final stages of the two competitions. For the past three years UEFA has carried out a simulation exercise to see how many clubs would have been in breach of the rules had they applied in that season. In each of the first two years there were five clubs that failed to meet the break-even rule; last year there were 13.

Excluding 13 clubs would be difficult. Applying penalties to some and not others could risk damaging litigation, while letting them all off would kill FFP. Moreover, simply knowing that UEFA faces this dilemma undermines the credibility of the rules in the eyes of the clubs, and some might be tempted to ignore FFP in belief that enforcement is not likely.

A lot will depend on the identity of the clubs in breach. Few would shed a tear for Paris Saint-Germain, and many hope to see Manchester City and Chelsea made an example of. On the other hand, if a club like Barcelona or Real Madrid turned out to be in breach it will be a nightmare for UEFA. Who said finance is boring?

Stefan Szymanski is Professor of Sport Management at the University of Michigan and co-author (with Simon Kuper) of the best-seller Soccernomics.

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