Financial Fair Play and its implications

Any self-respecting football fan is aware of the changes in the landscape of European football over the last 10-15 years as new money has come into the game. Transfer fee and player wage records have been broken, and broken over again. Clubs have gone from also-rans to trophy-contenders within a few seasons, by assembling super squads at astronomical costs. These have not only driven up transfer fees and player wages into the stratosphere, but also sidetracked player development initiatives, since winning via the more organic route takes longer.

It has also led to clubs running up losses while trying to win in the short term, and then owners abandoning ship, saddling clubs with huge debts, and often setting them back many years.

To counter this spiral from going out of hand, UEFA have come up with the Financial Fair Play regulations, or FFP as it is known in the football circles. What I am attempting here is to lay down what I understand from the FFP and how I think it will impact the game.

So, what is the FFP?
In it's simplest form, FFP wants clubs to live within their means. It wants football clubs to clear all their financial commitments on time and as per contractual terms, be it towards players, agents, tax authorities, other clubs or any other stakeholder. It also wants to ensure that managements act in a way that is beneficial to the long term health of the club, as against just short term success.

The aim of the FFP, as stated by UEFA, is not to make all clubs equal. Some natural differences exist amongst clubs in the same country, and also across countries. These reflect long-standing cultural, demographic and economic realities, and UEFA is not out to change this, in their own words. What it aims to do is to force football clubs to think longer-term over short term, and avoid the repeated crash-and-burn we have seen over the last decade or so.

The aim is not see a Champions League winner from Latvia in 2022.

UEFA can do this because it has a very lucrative carrot in its hands - license to participate in European competitions. Each year, every club (yes, every club) which intends to partake in European competitions, has to apply for a license from its national league/board to take part. These licenses are handed out by the national bodies in accordance with UEFA licensing regulations, which are tied to the FFP now. Clubs which dont clear the FFP hurdles will not be given a license from UEFA and hence cannot compete in the next season's European competitions.

The simplified math here is that the expenses of a club should not exceed its revenues, by more than a specified amount over any evaluation period.

So, what are the Revenues / Costs of a football club?

Source of Revenues

1. Broadcast rights - typically 35% of revenues (mainly in the big leagues, ~15% in the smaller leagues)
2. Sponsorship deals - typically 25% of revenues
3. Gate receipts - typically 20% of revenues
4. Other Commercial revenues (merchandise sales, etc) - typically 20% of revenues
5. One time revenues - prize mone, player sales, etc

Source of Expenses

1. Player wages
2. Player transfer costs
3. Other costs (Staff, administration, maintenance)
4. Investment into Academy / Stadium / Infra

So how does UEFA calculate the losses?

1. All revenues are allowed, including miscellaneous revenues from player sales
2. All expenses are deducted from this revenue figure, with the exception of
• Investment into building of stadium / infrastructure
• Investment into academies and in-house player development initiatives
• These are excluded from the calculations
3. Transfer costs are treated as amortized over the duration of the contract, and included in the expenses for each year
• For e.g., a player signed for a transfer fee of 80m on a 4-year contract will be amortized on the income statement (expensed, basically) at the rate of 20m p.a. for the next 4 years
• The balance of the transfer cost at any point is the remaining book value of the player
• In the above example, after 2 years of the contract, the player's book value will be 40m
• If any player is sold mid way through his contract, then the difference between the sale price and the book value is immediately recognized in the income statement as 'profit/loss from player sale'
4. Wages arising from any contract signed before 1st June'10 can be excluded for the 2011-12 calculations.
5. Apart from the above financial calculations, UEFA also requires all clubs to be up to date on their financial transactions with all their stake holders - player wages, taxes, transfer fees, etc.
• Malaga CF have been banned from participating in UEFA competitions due to violations on this clause
6. For the purposes of this article, let us call the final figure UEFA arrives at as 'allowable losses'.

Over what period are these financials evaluated?

1. Since different clubs have different reporting periods, UEFA has decided to evaluate any set of financials over 3-yr rolling periods.
2. Any club falling foul of the required financial discipline over the monitoring period will be punished for the season after the immediate one.
• for e.g. the first 3-year evaluation cycle was 2011-12 / 2012-13 / 2013-14. 
• These financials will be evaluated once the 2013-14 financials are reported. 
• If a club falls short, any penalty will be imposed for the 2015-16 season
3. The first evaluation cycle was a 2-season cycle of 2010-11 / 2011-12

What are the permissible loss limits?

1. For the first two monitoring periods (2010-11 to 2011-12 / 2011-12 to 2013-14), clubs are allowed to make 45m euros of allowable losses over the monitoring period, subject to
• the owner putting in an equity stake for any amount above 5m euros of losses over the monitoring period.
• Let us assume a club makes a loss of 40m over the monitoring period. On the surface, this passes the test, but only if
• its owner is willing to put in an additional equity of 35m, to cover the losses over 5m
• This investment has to be in the form of equity - meaning the club issues some additional shares which are then sold to the owner in return for his investment
• The owner might get his investment back if he is able to offload his stake at profit/break-even to another investor.
• This basically forces the owner to sink money into a loss making club, with no recourse - unless he can get another investor to buy his stake/club out
• While this may not be a problem for owners such as Roman Abrahimovich or Sheikh Mansour, majority of owners would be wary of getting into such investments too often, if ever.
2. For the next 3 monitoring periods, covering 2012-13 to 2016-17, the maximum allowable loss is 30m euros, over any rolling 3-year period, again subject to equity stakes beyomd 5m of losses
3. If the owners are unwilling to inject equity into the club, then the maximum allowable loss allowed is 5m euros over the monitoring period - break even for all practical purposes (5m of losses over 3 yrs)
• This holds for all monitoring periods until 2016-17 season

What are the punishments for breaching the FFP limits?

UEFA's punishments for breaching FFP stipulations range from warnings & fines to complete ban from European competitions, and even withdrawal of European titles.

The entire process of vetting the accounts is to be supervised by a body called the Club Financial Control Body (CFCB). It is an interctive process, and clubs whose numbers dont stack up, are asked / allowed to provide any appendages / supporting documents which can help them get through.

The CFCB will also verify if particular transactions were conducted at arm's length. For e.g., sponsorship deals and naming rights will be compared to other similar transactions in the market to ensure those are fair deals as against an owner trying to get around the rules by getting his companies make up the revenue deficit.

FFP allows clubs which fall short of the requirements get away without any punishment if UEFA feels that the trend of losses is heading in the right direction.

Will UEFA really punish the big fish?

We dont know. There is a healthy amount of skepticism (justifiably) about UEFA's spine (or lack thereof) in walking the talk if some big clubs (with wealthy owners) fall foul of the FFP stipulations. We will not know until we cross this bridge. With results of the latest round of FFP investigations to be published in May, we should know soon enough about the strength of UEFA's intentions.

What impact will this have on the game?

So far so good. The mathematics is simple. But what impact will it have on the game? This is where there is scope for a lot of debate.

Let me attempt this by breaking the potential impacts down into positives and negatives. First the positives.

1. Forcing clubs to live within their means will ensure that all clubs remain in at least a decent financial state, and hence prevent them from driving themselves into the ground. This is undeniably a positive regulatory oversight, on a group of professionals who have often needed protection from themselves.
2. Not penalizing clubs for investing in new infrastructure is undeniably a positive too. The EPL is a shining example of how new infrastructure can help drive not only more people, but also a more diverse set, to the stadiums. Newer stadiums typically have better seats, better amenities and a safer atmosphere. This makes for improved stadium attendances and improving gate receipts. Italy, on the other hand, is on the other end of the spectrum - with old stadiums, bad infrastructure and falling attendance. 
3. Investing in stadiums also allows clubs to own their stadiums as against leasing them from local / govt bodies - and owning one's stadium can bring in additional revenues in the form of naming rights, as well as giving the club the flexibility to monetize the stadium in other ways.
4. The above point holds equally for player development initiatives too. I dont think the benefits of developing players through your own academy / system can ever be overstated.
5. This should also dilute the trend of moneyed clubs offering obscene amounts to poach young talent coming through smaller, or even medium-sized clubs. Some of the transfer deals of PSG / Monaco in recent seasons come to mind. It should allow the 'feeder' clubs to reap the rewards of their player development initiatives, allowing them to build.

Now to the negatives

Old Boys Club

1. FFP's stringent regulations around overspending, while commendable in their motive, could end up making the upper echelons of football almost impenetrable to any new member.
2. With the FFP in place, club expenses have to match their revenues. Club revenues are primarily driven by sponsorship deals, broadcasting deals and gate receipts - all of which favor successful and well known teams. Hence, the existing set of strong teams already have an edge.
3. Overlap this with the current player mentality where the best players want to be playing in the Champions League every season, preferably at a club which can conceivably win it.
4. Consider some recent history of the Champions League. 
• Barcelona have made the semifinals in every season bar one between 2005/06-2012/13.
• Bayern Munich have made 3 finals in last 5 years. 
• Real Madrid have now played 4 semifinals in a row, making the final this year. 
• Chelsea have played semifinals in 7 of the last 10 seasons.
5. Yes, football has always seen clubs enjoy 3-5 yr periods of dominance where they do very well, but generally it is one or two clubs who do so at the same time. And it moved in cycles. What these stats show is that increasingly only a handful of teams can expect to be in last 4 of the CL.
6. The FFP will do nothing to stop this trend. The super clubs which are currently doing well, are already very successful on the field, and have strong brands across the globe. FFP will make them even stronger as the combination of their revenues married to their record of recent success is so strong a combination, that they will continue in their current position.
7. We should take a hint from the fact that none of the top clubs, some of whom had mulled forming their own super league, have objected to the FFP. You would think that if a regulation threatening to end an oligopoly was being passed, the oligopolists would be the first to oppose it. Instead, we find top clubs welcoming the FFP.
8. And this concentration of power hurts the game in the longer term. Take the example of the Spanish league. It was a very competitive league till about 2007/08. Then various challengers fell apart and it became a two horse race. This combined with the strong European credentials of both Barcelona and Real Madrid has meant that there have been 4-6 classicos almost every season. This was very exciting when it happened the first couple of times, but there are only so many 'biggest El Classico ever'.
9. On the other hand, look at how the EPL now routinely markets itself as the most competitive league in the world - and rightly so. And where has the competition come from - Chelsea and Manchester City - exactly the kind of successes the FFP wants to prevent.
10. I understand that such success has come with its own cost of these clubs inflating player salaries and transfer wages, but that seems to be the only way any club can make itself from an also-ran to a consistent competitor.
11. Some might point to the recent successes of Borussia Dortmund and Atletico Madrid, but their best performers typically end up leaving quickly for bigger clubs, thus setting them back a few  years again.

Having said all of the above, I am still in-principle in favor of the FFP. There is a need for football to be more fiscally disciplined, and also allow for more long term team building as against short term team assembling. This also reduces the chances of particular presidents or owners driving the club to ruin through short termism.

In fact, in the NBA, the salary cap system enforced in 2010 has leveled the playing field a lot and also started rewarding teams for making smart choices. Obviously, there are differences between the two with one being a closed national league and the other a far more open proposition.

In conclusion, I think the FFP is a start in the right direction from the aspect of governance in football, as long as the governing body shows it is willing to punish even the biggest of the fishes which fall foul of the rules. This should start becoming clear over as the first few evaluation cycles are completed.

But I also think it could end up making the big boys of football even bigger, impacting the longer term quality of the product.