Financial Fair Play Explained – and the implications for Bundesliga clubs

by Gard Lid Aabakken

Europe’s most prestigious club tournaments, the Champions League and it’s little brother the Europa League started up again weeks ago. Great anticipation was evident for the enticing matchups, the world’s greatest players, its drama, its action – and its money. The total pot of earnings stands to be divided by the 32 teams in Europe’s finest competition, and has now reached a record of € 900 M per season(By comparison: The teams in the Europa League divide a mere 225 million € amongst themselves). The competition to be in it has never been more fierce, and many will do whatever it takes to get there.

If one happened to catch the draw of the Champions League or Europa League group stage 6 weeks ago, one may have heard amid UEFA director Gianni Infantinos usual mindnumbingly boring presentation of the rules of the draw, directly preceding the draw – a warning.

Mr. Infantino warned the room, with officials of most of Europe’s big clubs present and the world (at least the football-geeks of the world) watching, UEFA will not hesitate in taking action against clubs that do not comply with the new Financial Fair Play rules (FFP).

This was followed by an unprecedented PR-offensive by Michel Platini and UEFA, telling anyone with a pen and paper or – perhaps more fittingly, a laptop and an internet hookup – that FFP will become a reality, and that clubs better suit up and let some sunshine in (to their books)…

Background

The story has been the same for a long while now: Football revenue rises, but the costs have outgrown this rise in income year after year. Hence the losses also rise, season after season. In 2010, the cumulative losses from the largest leagues in Europe were 1.640 million Euros. Debts rose to a staggering total of over € 8.400 M – that’s right, well over 8 billion Euros.

At one point, 16 out of 20 Premier League clubs had losses, despite the Premiership being the overwhelmingly best earning league in the world. The total of Premier League clubs losing money has usually been between 12 and 14.

A UEFA investigation in 2010, revealed that half of 650 clubs in Europe made losses every year. 20% of clubs were making huge losses, spending 120% or more compared against their income.

While the losses are a big problem – and the piling up of debts (if there’s no sugar daddy to pay for the losses being made) – the sugar daddys themselves are, too. And not just for spoiled fans of big clubs wanting the playground to themselves – it is felt throughout the entire food chain of clubs, through wage inflation:

Infantino said the primary reason for the losses is wage and transfer inflation driven by clubs relying on owner finance or debt.

“Around one third of the clubs are spending 70 per cent or more of their revenues on wages. Revenues across European football grew by 10 per cent last year, but the salaries of players and coaches have gone up by around 18 per cent.”

The development of European football economics have in many aspects mirrored the development in the rest of Europe. So while several European economies are suffering under austerity measures to reduce deficits, what is to solution to football’s spending problems?

UEFA’s new Financial Fair Play rules. At least, that’s the theory.

First off, they are not entirely new. They were adopted by UEFA in September 2009, on the behest of the European Club Association (with a certain Karl Heinz Rummenigge as it’s leader, in a perhaps somewhat dubious double role) – ECA – which is the organ protecting club interests in Europe.  The rules are already in effect since the start of the start of the 2011/12-season. They also have the full support of the European Commission, which also declared FFP fully compliant with European Law.

Now why, you might wonder, haven’t Manchester City or PSG or those other naughty oil-fuelled noveau riches been unceremoniously hurled out of the Champions League?

“Slow train coming” – Reform

As with most reforms, this one is not set to work overnight, even if it’s dampening effects should, in theory, be felt already. The very first review of the accounts of the different European teams will take place after the end of the current 2012/13 season, and will then jointly address the 2011-13 seasons, the first two seasons of FFP.

The rules state that clubs can make deficits of a combined maximum of € 45 M the first 2 seasons, or € 22,5 M on average. The monitoring period then expands to 3 seasons (2011-14) after 2013-14 season is finished, but the allowed losses are still € 45 M, making the loss allowed on average a mere € 15 M per season. With the 2014-15 season, the sum is reduced to € 30 M over 3 seasons, or € 10 M on average. The direction is easy to spot, UEFA will be tightening its grip on deficits each season.

The spending rules illustrated by the excellent Swissramble.

It’s worth to point out that for these losses to be allowed, the owners have to cover them. If not, the only allowed losses are € 5 M for the whole of a monitoring period. This means the tolerance is much lower for losses which will result in an increased debt, instead of the drainage of some Arabian sheik’s trust fund .

UEFA have identified prioritized areas which they do not want to see negatively affected by FFP, however, and there are some notable exceptions here. Most prominently: all expenses for talent development and for stadium building & development are exempt from the break-even calculations. This is very relevant to German teams, since all teams in the 1. and 2. Bundesliga are obligated to run an academy to retain a license. Many teams, for instance Schalke, Hannover and Bayern are servicing debts from the building of new stadiums, and all expenses relating to those activities are going to be deducted from the break-even calculations.

Should clubs fail to conform to these rules, UEFA have a host of possible sanctions in place. They are, in order of severity:  A warning, a fine, deduction of points, withholding of UEFA revenue, prohibiting the registration of new players for UEFA competitions, restrictions on the number of players that can be registered, disqualification from an ongoing competition and finally exclusion from future competitions.
As was seen last week, the 4th punishment(withholding of revenue) has already been applied.

Enforcement –WWPRD (What Would Platini (Really) Do?)

Following the CL & EL-draws in Monaco, and the European Super Cup played in the same town, Platini personally took charge of a PR offensive, telling everyone who would listen that FFP is not a fad, scarecrow or hype.

“I repeat – we will never go back,” said Mr Platini. “We took the decision to introduce financial fair play some years ago with the unanimous support of all the European clubs, the national associations, the politicians. This is something that is very positive, and we will continue.”

With this, Platini has effectively staked his own reputation – and that of UEFA under his stewardship – on FFP being successful. Being a very clear candidate for taking the reins of FIFA the day Mr. Blatter will leave his office (either to lukewarm applause or in cuffs), much depends on wether or not FFP is going to be a success – and he has just up’ed the ante.

Following the news of 4 Turkish and Balkan clubs being suspended from partaking in European contest just over a week ago, UEFA dropped a bombshell – 23 clubs have been notified they will not receive prize money from their participation in UEFA-competitions, until further investigation has commenced.

This relates to a somewhat lesser known part of the enhanced FFP rulebook, where owing money to tax authorities or not paying your dues on transfer agreements, can result in severe penalties by UEFA.

Among those named were Malaga, Sporting Lisbon, Rubin Kazan, Fenerbache – and the winners of 2 Europa Leagues titles over the last 3 years, Atletico Madrid.

There has been much doubt cast about how many, or if indeed any, of the FFP regulations were going to be enforced or enforceable, though many of the “loopholes” which have been talked about are addressed by the FFP rules, and there already exists built-in protections against them in the FFP rules – numbering about 90 pages.

It seems very clear that UEFA is going to put its money where its mouth is from the get-go, so there won’t be any doubt about the sincerity of will. Harshly punishing medium sized clubs while treating the larger ones to impunity from sanctions, would be a PR scandal for FFP.

What, however, will FFP mean for German football?

Domestic consequences – Bundesliga:

In short – for the competition in the Bundesliga, not much will change, as the financial situation in the Bundesliga is already quite settled.

The Bundesliga has already been operating with a sort of FFP of their own for a long time. The clubs are obligated to submit balanced budgets to acquire a license to play in the 1.or 2. Bundesliga. This should theoretically provide Bundesliga clubs with a profit or a break-even result on their balance sheets. This is the case – most of the time.

As keen observers might remember, however, this requirement hasn’t been a total failsafe against getting into trouble – BVB being the most prominent example, who teetered on the brink of total collapse just under 7 years ago, due to a sporting disaster (particularly the failure to reach the champions league of 2003 and beyond), some costly transfers, and less than projected revenue from both on-field activities and the shortfall of TV-money affecting all of German football after the collapse of the Kirch media empire.

However, now Dortmund are back in (the) black, and have turned it all around, both on and off the field. This year ended with record revenue of € 215 M and almost € 35 M profits – a new record. With earlier financial trouble child Schalke also in a stabile financial position due to good sponsorship deals, particularly with Gazprom, a very profitable 2010/11-season that included a run to the CL-semis and the painful, but profitable, sale of Manuel Neuer, the Bundesliga clubs are today all quite financially healthy – something reflected in the combined profit statistics. Germany is year in and year out ranked top of the pile in terms of the combined financial performance amongst the top leagues.

This means, since the FFP rules are more or less already implemented in Germany, it’s rather safe to assume that the advent of FFP on the European stage will not do much to skew how the Bundesliga functions or it’s competition. It will probably even make the already faint possibility of some rich beyond rich individual pulling a “City”, and completely upending the Bundesliga at some point, even less likely.

Speculation to further effects could be for instance that when Spanish, English and Italian clubs are forced to live within their financial means, German clubs would get closer in the financial competition for ascending stars, which in turn could mean an increase in long-term interest for the Bundesliga TV-rights, and more money from media income, with a higher global star & glamour factor. As much as good football, which the Bundesliga has, big names also sell football globally.

The Bundesliga already has experienced a marked uptick in interest abroad, increasing it’s overseas TV income by about 100%  this year – admittedly from a very low starting point. The Bundesliga should expect to do much better in this area in the future.

However, as TV income is shared very equitably in the Bundesliga with no sign of significant change in this respect, it’s unlikely to skew the competition profoundly.

Many fans fear increasing ticket prices as a result of the FFP rules forcing the clubs to live within their means. There is certainly a lot of untapped potential in terms of revenue from ticketing for Bundesliga clubs, given that ticket prices generally are quite low across the board – at € 22,75 per average ticket, Germany’s teams demand only about 40% of what Premier League sides do from their fans. Indeed, finance experts have estimated that the clubs in the Bundesliga were leaving at least € 100 M at the table each season, when this seasons ticket prices were released this summer.

However, German clubs have resisted raising prices too much, many putting a premium on maintaining a social profile. Furthermore, given that German clubs are almost all owned by the members, there’s a very strong safeguard against unreasonable large price hikes. Just this weekend saw a fan-protest called “kein zwanni” (i.e. “no € 20-tickets”) directed at HSV, maintaining the view that standing tickets should cost under € 20. Fans from other big leagues might look on in disbelief.

Possible exceptions:

Almost all Bundesliga clubs are owned by their members, escaping the influence of a wealthy benefactors. There are three exceptions in the Bundesliga, however:

  • Wolfsburg, owned by the Volkswagen corporation.
  • Bayer Leverkusen owned by pharmaceutical company Bayer AG.
  • Hoffenheim – benefactored by SAP-billionaire Dietmar Hopp.

Players in dire need of some Aspirin: Leverkusen’s best campaign ended with second place finishes in three competitions.

While these clubs have had significant cash infusions by their owners, they’ve never been anywhere near pulling a “Chelsea”,“City” or “PSG”. Leverkusen have often been fighting in the top – also in part due to their very good player recruitment – but combined these 3 clubs share only 1 championship in the Bundesliga– belonging to Wolfsburg, who pulled off this rather surprising feat under Felix Magath’s sturdy leadership in 2009.

Breaking-even in accordance to the FFP rules should not be a problem for these clubs in the near future, given the rather comfortable deficit limits for anyone, but the really high spenders in international football. Keep in mind that there are higher limits for losses as long as the owners are wiling to cover them.

However, some aspects of their dealings might become subject to scrutiny. Take for instance Wolfsburg, who have an amazingly lucrative shirt sponsorship deal with Volkswagen, valued at somewhere between € 20-30 M. This is rivaling the very elite clubs in Europe (Liverpool, Bayern, Barcelona etc.) in worth, and crushing most clubs – including Arsenal, Chelsea and all Italian Serie A teams.

To prevent clubs with rich owners sneaking around the FFP provisions by overpaying them for sponsorship deals or services through other companies they own or have interests in, UEFA have instituted the so called “fair value” provisions. These only apply if the company sponsoring is considered a “related party”. I won’t go into detail, but Volkswagen as VfL Wolfsburg’s owners, are definitely a “related party”. Should UEFA deem the amount Wolfsburg gets for its shirt deal exceeding “fair value” for such a deal – it’s approximate worth in a free market – the value of the deal would be written down to the fair value sum, for purposes of seeing what income a shirt deal with an actual third party would have generated, giving a clear picture of how such a deal would have effected the breaking-even calculations in FFP.

Taking these provisions into account, it looks like these clubs might have to do with a little less income from their benefactors in the long run.

Consequences on the European stage:

It’s certainly a very un-romantic notion of football, but the rule of thumb is that today’s results in the top leagues and in Europe correlate very strongly with the amount of wages the teams hand out. This is luckily not always the case ,of course – take Dortmund beating Bayern 2 years straight for instance, or Porto winning the Champions League – but there’s a very high degree of correlation, still. According to Stefan Szymanski, the co-writer of Soccernomics (alongside the more well known journalist and writer Simon Kuper), a team’s finishing position in their domestic league competition correlated with the wages said team were paying at about a 90% rate over a 15 year period.

So when Hannover met Atletico Madrid in the Europe League quarterfinals last year, it shouldn’t come as a huge surprise that Atletico won on the day. Both days actually. Falcao made all the difference, with 2 goals in a 4-2 aggregate victory.

Falcao’s goals put an end to Hannover’s amazing Europa League campaign last season.

But wait a minute: Afore mentioned Atletico is among the clubs UEFA put on the list mentioned earlier. They owe about 5 times their yearly revenue (€ 514 M compared to their € 100 M yearly income), and amongst other debts there are between € 155-167 M of net tax debt to the Spanish government, according to the excellent and indispensable SwissRamble.

And while it’s suspected that the € 47 M paid last summer were in part financed by the shady dealings of the Portuguese super agent Jorge Mendes, missing payments for the very Falcao firing them past Hannover and later into winning the tournament itself, is why they have gotten on UEFA’s bad boy list. Atletico might be much the bigger team and might have won anyway with another striker, but it’s doubtless that the overspending in question and being able to get one of the world’s finest number 9’s through it has very real consequences on the pitch.

Atletico is of course only part of the problem. Spanish football clubs currently owe the government about € 1.350 Million. And that’s before all the other debts – Teams of the Primera Division alone holds in excess of € 4.650 Million of debts per 2010/11.

Spanish football is not the only sinner. As mentioned earlier, a domestic football economy often times mirrors the domestic economy as a whole, this is true in other nations too. Both Italian and to some degree English football struggles with economic problems. On the other side, the finances and economy of both German football and the country as a whole, have been more sound. Renowned Spanish football economy expert Jose Maria de Gay of the University of Barcelona recently said Germany and France were the models for sustainable football, while at the same time controversially claiming that “Spanish football is dying” through debt and the financial chasm between Real Madrid & Barcelona, and the rest of La Liga, which is widening every season. A very contrarian view in a time where Spanish football’s recent successes on the pitch are celebrated worldwide.

Remember Dortmunds revenue and profit record? Their € 215 M revenue of last year, puts them just about € 20 M behind what an illustrious side like AC Milan earned last year. It’s actually more than Inter take home and just about on par with Juventus.

While I’m not implying BVB is going to buy their way back into the top of Europe – they’ve been masterful at cultivating talent in the Klopp-era – their increased financial muscles are going to help the club immensely in terms of keeping their talent and acquiring some new stars when in need – something they’ve already tried their hand at, when replacing Kagawa with an unprecedented (post-meltdown) € 18 M purchase of Marco Reus.

BVB, and other German teams with some financial backbone, are going to be much better placed in Europe when the likes of Abramovich, Moratti and Berlusconi no longer can use immense personal wealth to prop up their teams and make the salaries on offer irresistibly high.

Uli Hoeness, speaking to a forum of journalist students just last week, mentioned that if (and that is of course a big if still) FFP has the desired effects, German football should prosper in the coming decade – “maybe even a golden age is looming”, he added.

A study by Brand Finance surfacing the same week, revealed its findings in terms of brand value, proving Hoeness’s assessment to a certain degree:

“The German Fußball-Bundesliga comes in at a comfortable 2nd, well above the Spanish La Liga and Italian Serie A, which may come as a shock to some. What our analysis reveals is that the most valuable leagues have strength in the depth, not just in one or two big teams.”

Club specifically, the study placed Bayern 2nd, Schalke 10th, Dortmund 11th and HSV 17th in terms of brand value. German football should be able to further strengthen their already solid commercial & sponsoring intake in the coming years.

Returning to specifics, realistically only Schalke seems capable of joining Dortmund as a member of the clubs shadowing Europes absolute financial elite (Real Madrid, Barcelona, the Manchester clubs, Bayern Munich and Chelsea) at the moment, and as long-term outsiders for the Champions League title.
Schalke, following their unprecedented run to the Champions League semifinals in 2010/11, for the first time surpassed the € 200 M-income limit, placing them 10th in Deloitte’s football money league, detailing the income of European clubs. They have been growing structurally for a good while now.
BVB would have placed 8th in the same list, with their income of 2011/12. In the last few years, Stuttgart and Werder have also visited the top 20 of European clubs on this, of times because of the income from good European years with little consistency to it.

The only other club who could plausibly muster the financial forces to break into similar terrain is HSV, being from Germanys second largest city and ranking 11th (!) in football income in Europe only 3 years ago.

One wonders where all the money went – and it will surely be some time before they can turn around their super tanker headed for shore, before they steer towards a date with European football’s money faucet, the Champions League. Qualifying for Europe’s finest competition is unfortunately an requirement these days, if a team wants to create a revenue stream that potentially could create a financial snowball effect.

Schalke were the last German team to win the Uefa Cup in 1997.

However, going anywhere near the Champions League title is increasingly for the select few. A competition where German teams have really underachieved in the latter years, and should be expected to do better in the time to come, is the Europa League.

The Europa League is the perfect fit for Germany. As opposed to Italy or England, people turn up in droves to see the their teams in the EL. There aren’t many places where more than 52.000 people turn up to watch AEK Larnaca play on a chilly mid-November night, but in Gelsenkirchen, they do. The same goes for the guys from Poltava, whom 42.000 watched in Hanover in mid-December. The fervor for Europa League matches has reached the point where a few hundred people even camped outside the stadium to get their tickets for the monumental showdown with Twente Entschede! Where else does that happen, but in Germany?

The EL’s TV rights are also sold at comparatively high prices in Germany, meaning the EL financial yield isn’t so negligible as for teams of other large European nations. Because of Germany’s fluent and competitive league, many different clubs will get a chance to play in it – 10 different teams have during the last 4 seasons.

With the competitors from Iberia and Italy needing to make adjustments to the new financial set of rules, the playing field should get more level for mid level clubs, too – and the afore mentioned fluidity of the Bundesliga guarantees strong teams like Schalke or Leverkusen playing Europa League football from time to time. A German win in Europe’s second finest competition is really overdue – the last win in the old UEFA cup was Schalke’s triumph over Inter in 1997 – and I expect a Bundesliga team should at least get to a final in the near future.

If Uli Hoeness is proven right when prophesizing a possible golden German football future, remains to be seen. But for German football, renewed European success might be a very real bonus stemming from this attempt of saving European football from self-destructing.

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Author:Gard Lid Aabakken

Gard Aabakken is a law student, occasional football writer and analyst residing in sunny Oslo, Norway. He has a particular passion for Bayern Munich, German football in general , it's history, and the football finance aspect of things. Follow Gard on twitter @BayernNorway
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