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SAFC and Financial Fair Play...

With UEFA's Financial Fair Play Rule coming into effect soon, I decided to look at how it would affect Sunderland. Then It all got a bit mind boggling, so I contacted someone who knows his stuff. The Swiss Ramble is one of the best blogs out there, and they were kind enough to explain a few things, and how the new ruling may affect SAFC...

They call it the ‘Financial Fair Play Rule’ but how ‘fair’ is it? From someone like myself, who knows very little of how finances work, it would appear the teams at the top stacked with talented players will be the ones to prosper. As without serious investment, the others won’t be able to catch up?

At it's simplest, the Financial Fair Play Rules are trying to encourage clubs to live within their means, i.e. not spend more money than they earn, which can only be considered as basic common sense. Note that the rules do not actually force a club to become profitable. All that UEFA are saying is that clubs will not be allowed to compete in their competitions (Champions League and Europa League) if they do not break-even, but clubs making losses could continue to compete in their domestic league without any sanctions.

As you say, there is a risk that these regulations will simply entrench the current leading teams, "survival of the fattest" as it has been termed, and that they will be an unfair barrier to mid-table clubs, but there's nothing to stop a wealthy benefactor joining a club, investing his money in a new stadium or developing the youth academy and increasing a club's revenue in those ways, as such investment is excluded from UEFA's break-even calculation. Of course, that means that the journey would probably take longer, but that's not necessarily a bad thing.

The sugar daddy model can work well, but there are always two sides to the story. While the benefactor remains at the club and is happy to cover losses, everything is fine, but there is always the nagging concern that he will leave for whatever reason (bored, ill health, diminishing wealth, accused of fraud, etc), which can leave a club in desperate straits, e.g. Portsmouth. There's another aspect too, which is whether money coming in to boost one mid-table club is fair on others in the same situation, e.g. Al Fayed's millions have clearly benefited Fulham, but that's left a well managed club like Everton relatively worse off.

So, on the whole, I believe that this legislation is a good thing, but we'll have to see how it works in practice, as the old economists' law of unintended consequences might come into play.

Will the Premier League be hit the hardest due to the 50% tax on high earners in the UK? It would surely mean top players will ply their trade elsewhere for more money?

There's already some evidence of fewer top players coming to the Premier League for monetary reasons, both due to the higher tax rate and the weakness of Sterling. That said, Premier League clubs still receive very high television income compared to all but the largest clubs on the continent, so there's still likely to be an influx of foreign players, though maybe not the absolute top stars.

How firm a hand do you think UEFA will really take? Should the worst happen to a club like Real Madrid, Barcelona or Man United will UEFA have the balls to ban them from Europe or will there always be a loophole for the big boys?

Will the regulators have the bite to go with their bark? Expelling teams from European competitions works fine on paper, but it might never happen in reality, especially when you consider that Europe’s most indebted teams are among those that attract the largest television audiences. Would UEFA really bite the hand that feeds? Yes, if you believe UEFA president Michel Platini, who earlier this month, "It will have to be time for them to face the music if there is a club that doesn’t fall in line. It is not something I want, but it is something the disciplinary bodies will look at. It will be a last resort. Football will continue without them." Asked to expand on this, UEFA's general secretary, Gianni Infantino, said, "There may be intermediate measures. We would have to ask why, maybe there would be a warning, but we would bar clubs in breach of the rules from playing in the Champions League or the Europa League. Otherwise, we lose all credibility." Funnily enough, my own analysis indicates that clubs like Real Madrid, Barcelona and Manchester United with their ability to generate huge revenues will have few problems meeting UEFA's guidelines.

Sunderland look like they could be headed into Europe this season, and should in theory be pushing for Europe in 2012 when the new UEFA Financial Fair Play Rules kick in. At the start of this season SAFC were £26m down on the target to ‘break even’ and get into Europe. How easy/difficult would this be to recover for a club of our size?

The first season that UEFA will start monitoring clubs is 2013/14, but this will take into account the losses made in the two preceding years, namely 2011/12 and 2012/13, so the accounts need to be in far better shape pretty quickly. However, they don’t need to be absolutely perfect by then, as wealthy owners will be allowed to absorb aggregate losses (so-called "acceptable deviations") of €45 million (£39 million), initially over two years and then over a three-year monitoring period, as long as they are willing to cover the deficit by making equity contributions. The maximum permitted loss then falls to €30 million (£26 million) from 2015/16 and will be further reduced from 2018/19 (to an unspecified amount).

Looking at Sunderland's last published accounts (2008/09), there was indeed a loss of £26m on revenue of £65m (match day £14 million, television £35 million and commercial £16 million). It would be difficult for them to significantly increase match day revenue without taking the unpopular step of raising ticket prices or building a new stadium (which would bring its own challenges and is not a magic bullet). Similarly, the commercial revenue appears reasonable for a club of Sunderland's size, though this is an area where continental clubs have done much better than English clubs, so there is some scope for growth, especially as Sunderland were one of only two Premier League clubs whose shirt sponsorship decreased this season (Newcastle were the other one).

The best bet, as ever, is TV. In fact, we already know that this will be £2 million higher in the 2009/10 season with £37 million being distributed from the Premier League and it will be even higher this season: (a) because of the more lucrative new three-year Premier League contract; (b) Sunderland may well finish in a higher position than last season's 13th place, so will receive a larger merit payment. In total, these factors could be worth another £10 million.

Qualifying for Europe would also help financially, but fans should understand that there is an enormous difference between the Champions League and Europa League in terms of payments. Last season, the four English teams in the Champions League received £29 million on average, while Fulham's run to the final of the Europa League only earned them £8 million.

Of course, the easiest way for Sunderland and others to break-even is to reduce wages. At £50 million, these are around 77% of turnover, which is above UEFA's recommended maximum limit of 70%. The trouble is that if you reduce your wage bill, you are likely to make the team less competitive, which will hurt you on the revenue side (not to mention upset the fans), so it's a delicate balance.

Finally, many clubs boost their financials by making regular profits on player sales, which is particularly effective if the player has been developed in-house (*cough* Jordan Henderson).

Our owner, Ellis Short, is said to have converted loans into shares, which I’m lead to believe will be of benefit to us. However, as previously mentioned finances aren’t my forte. What is this, how is it done and exactly how is it of benefit to the club?

Yes, this would be of of benefit to the club, as converting loans into capital reduces the club's debt, which not only reduces the annual interest payments, but means that there would be no debt issues if the owner were to walk away. There's not much benefit in terms of UEFA FFPR, as these don't really focus on debt, just the club's ability to service the debt, i.e. cover the interest payments.

How would this affect a team wanting to build a new stadium, or make upgrades to a current Stadium? I ask as SAFC have the option to extend the Stadium Of Light, which would obviously cost a few million to do. Would we have to sacrifice a player or two to do so?

UEFA's break-even calculation excludes any costs incurred for what they term sensible, long-term investment like improving the stadium, training facilities, youth and community development, so the only challenge for Sunderland would be whether thy could finance the stadium extension, either via loans from the owner or the banks. That may have an impact on the club's transfer policy (see what happened at Arsenal after the move to the Emirates), but has nothing to do with the UEFA rules.

Sunderland CEO Steve Walton has lumped us in as running the same model as Man City & Chelsea, who most would think without looking are amongst the most likely to be penalised with their recent spending. Do you think Steve is right, and is this model a doomed one?

In a way, he's right, though it's clearly on an altogether different scale. My guess is that UEFA will be comfortable with the benefactor model to a limited extent, i.e. they will continue to allow owners to cover reasonable losses ("acceptable deviations") for some time yet. However, they clearly do want to reduce the reliance on this approach. As Gianni Infantino said recently, "What kind of healthy business is it that waits for a white knight on a horse with a lot of money to throw around and then, from one day or another, he could jump on his horse and ride away?"

Do you see any major flaws in the new rule, and what would you change?

That might well be the subject of a future blog of my own, so I hope you'll understand if I keep my powder dry on that one!

If your readers would like any more detail on UEFA's Financial Fair Play Rules, I would point them in the direction of two lengthy articles I have written on the subject:

How Manchester City Could Break Even
UEFA Say Fair Play To Arsenal

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