Will football clubs play fair financially?

Europe’s leading football clubs face a race against time to comply with new rules that limit the amount they can spend – and the consequences for breaking these targets will be significant.

The region’s governing body UEFA has acted because most teams are living beyond their means, racking up big debts in order to fund massive player transfers and salaries.

While larger clubs thrive because of huge revenues and – increasingly – extremely wealthy owners, smaller sides are finding it harder and harder to survive.

UEFA’s Financial Fair Play (FFP) rules apply now but will come fully into force in 2014. They give the ruling body sweeping powers, including exclusion from the lucrative Champions League – entry into which provides substantial financial rewards.

Big annual losses posted by big-spending English teams Manchester City and Chelsea and European champions Barcelona mean that the continent’s top clubs will come under severe scrutiny.

FFP skeptics claim that when it comes to the crunch, the elite teams will be spared serious punishments, but according to journalist David Conn, a leading authority on the new rules, they are very much mistaken.

“You have to ask yourself why UEFA introduced FFP when they were under no pressure to do it?” Conn, who writes for British newspaper the Guardian, told CNN.

“Why would they do it, then then lose all credibility if they don’t enforce it?”

UEFA’s head of licensing Andrea Traverso is in no doubt that his organization has the powers and the willingness to act.

“We will be able to enforce the rule because we believe they are sufficiently well-structured to be implemented right across the European leagues,” he told CNN.

But UEFA’s latest report, published in January, shows the extent of the problem. Losses incurred by leading clubs in 2010 rose by 36% from the year before to €1.6 billion ($2 billion). Some 56% of top-flight teams made losses.

“This trend needs to be reversed very quickly,” UEFA’s general secretary Gianni Infantino said in a covering report.

What is Financial Fair Play?

An examination of the FFP rules shows that UEFA’s warnings need to be taken seriously.

It has started auditing club’s financial statements for this season, with a two-year lead in for the start of the 2013-14 season when FFP kicks in.

During this first period, clubs will be allowed to make what Traverso terms an “acceptable deviation” of €45 million ($65 million) in losses.

For the three-year period from 2015, the limit will be €30 million ($39.1 million) total in losses and from 2018 the annual losses must be kept below €10.5 million ($13.73 million)

The definition of what is covered by the FFP regulations also provides an important caveat.

Clubs only need to account for “football-related expenditure.” This covers what they spend on transfers and salaries against commercially generated revenues such as sponsorships and TV income. Investment on a stadium, training facilities or youth development is exempt.

But clubs looking to circumvent the rules by having lavish sponsorship deals from a benefactor may have to think twice.

The sponsorship deal by Manchester City’s Abu Dhabi owners, struck with the gulf state’s national airline Etihad Airways, is under investigation by UEFA, claims Conn.

The club and the airline have a £400 million ($628 million) partnership, but the influential Council of Europe described this as an “improper transaction” in a report it has sent to UEFA.

The Council of Europe also highlighted Real Madrid’s sale of the club’s training ground to the city for more than €400 million ($523 million) as another example which might breach FFP rules.

Which clubs are most under threat?

Traverso would not name names when asked which teams do not meet the FFP requirements. “We do not single out individual clubs,” he told CNN.

But UEFA’s own report said that “13 clubs would not have passed the test if requirements for 2013-14 were imposed immediately,” including several from England.

While clubs’ incomes increased between 2009 and 2010, it did not offset their higher expenses. Player wages continued to increase, while income from transfer fees fell, according to UEFA.

Conn said that Manchester City and Chelsea were most in danger, of the leading English Premier League clubs.

City posted a record loss of £194.9 million ($306 million) in the third year of ownership by Sheikh Mansour bin Zayed al-Nahyan.

“Chelsea in particular have a problem if they do not qualify for the Champions League over the next few seasons,” said Conn.

The London side’s financial results for the 2010-2011 season show a loss of £67.7 million ($106 million) – with £28 million ($43.9 million) relating to the replacement of manager Carlo Ancelotti with Andre Villas-Boas.

Given billionaire owner Roman Abramovich’s recent sacking of Villas-Boas less than a season into his three-year contract, it is unlikely those figures will improve for 2011-12 when FFP begins to bite.

But Conn believes that reigning EPL champions Manchester United – because of their massive commercial revenues and the restructuring of their debt – can rest easy for now along with Arsenal and Tottenham Hotspur.

United’s financial results for the year ending June 2011 showed a headline pre-tax profit of £29.7 million ($46.6 million) and reductions in the debt which the Glazer family leveraged to take control of the club in 2005.

Spanish perspective

It is a mixed picture for the La Liga giants, with Barcelona most at threat while arch-rivals Real Madrid are protected by massive revenues – notwithstanding possible issues with the sale of their training ground.

Barca vice-president Javier Faux took over last year with a mandate to reduce the Catalan club’s losses, which totaled €83 million ($108 million) in 2010.

“We can’t go on losing money,” he told Barca’s official website. “Our objective is to make us the most solvent club in the world in two or three years.”

Losses for 2011 were subsequently reduced to €9.3 million ($12 million), boosted by winning the double of Champions League and La Liga.

Mindful of their deficits, which also included those racked up by the other sporting clubs under the Barcelona umbrella such as basketball and handball, in December 2010 the Spanish side signed a shirt sponsor deal for the first time in 111 years of existence. A five-year, €150 million contract with the Qatar Foundation replaced a free promotion of children’s charity UNICEF.

By contrast, Real are largely insulated by the enormous revenues which enabled this season’s La Liga leaders to top the Deloitte football rich list for the seventh successive year. Income to June 2011 of $636.5 million put Madrid in the black with a €46.5 million ($60.5 million) pre-tax profit.

Italy’s problem

Serie A clubs are also wrestling with an FFP problem, in particular city rivals AC Milan and Inter – whose traditional domination of Italian football guarantees regular appearances in the Champions League.

Neither can rely on the massive television income of their Spanish and English counterparts, and their match day and commercial revenue are also lower.

Inter may have won the Champions League in 2010, but offloaded star striker Samuel Eto’o to Russian big spenders Anzhi Makhachkala in an attempt to cut their wage bill.

Linked to Manchester City’s Carlos Tevez, Inter’s sporting director Marko Branca admitted they would be struggling to afford him.

“He is a great player but a move for him is out of the question,” Branca was quoted by UK’s Press Association. “We have to organize our finances for the financial fair play rules in the next two years.”

The position is scarcely better at Milan, owned and financially underpinned by Italy’s former prime minister Silvio Berlusconi – one of the country’s wealthiest men.

Milan’s 2010 losses totaled €69.8 million ($91 million) and club chief Adriano Galliani highlighted the challenge ahead.

“Financial fair play hurts Italy. There will no longer be the patrons who can intervene,” he told Sky Sports Italia.

“Until now people like Berlusconi and (Massimo) Moratti (Inter’s owner) would be able to support this, but with the fair play it will no longer be possible.”

Germany’s leading Bundesliga clubs like Bayern Munich and Borussia Dortmund are not considered under threat by FFP, posting regular small profits, but the influx of Qatari money at French side Paris St. Germain could leave the Ligue 1 title challengers in difficulty if the situation mirrors Manchester City.

“It may not be a good time to invest in PSG in that way,” said Conn.

A new financial reality?

With all clubs, even those with massive revenues such as a Real Madrid and Manchester United, looking to trim costs to comply with FFP, the first sign of a new reality may have occurred in the latest European transfer window.

Spending across the major leagues, and in particular the EPL with a fall of approximately 70%, was significantly reduced.

“FFP was definitely a factor,” Alan Switzer, a director of the sports business group of Deloitte, told CNN.

“It has played its part in dampening down the market, particularly with the 2011-12 accounts of the clubs counting for the first time.”

Conn, who is writing a book on Manchester City, believed that the EPL leaders would have invested heavily in January if not for FFP.

In 2011’s corresponding window City signed striker Edin Dzeko from Wolfsburg, but this year the sole acquisition was David Pizarro on loan from Roma.

“If it wasn’t for FFP they would have brought in players,” said Conn. “Basically they are taking it seriously and they are going to rein things in.”

Will UEFA take strong action?

The acid test of any new regulations, and in particular FFP, is will they be enforced?

Traverso hopes that his softly softly approach will pay dividends, so ultimate sanctions like throwing a big club out of the Champions League will not be necessary.

“Clubs have generally taken serious steps in order to comply with the regulations,” he told CNN. “It is difficult to foresee every possible scenario – the rules are not set in stone, they can be adapted.”

Conn points to the strengthening of the UEFA licensing and legal team with the appointment of top English lawyer Alasdair Bell.

“They are readying themselves for legal challenges from top clubs and sending out a clear message they will be able to counter them,” he said.

UEFA president Michel Platini has nailed his colors to the changes as he seeks to create a more level playing field for clubs.

“They didn’t have to do this, what’s in it for them?” Conn said. “It will ruin Platini’s reputation if they don’t follow through on it.”

With player wages one of the major factors on balance sheets, Switzer said UEFA will be “looking very closely at trends” as the top clubs wrestle to control their costs.

Whether the financial reality extends to the megastars of world football only time will tell, but their owners are certainly taking the deadline seriously.