How Financial Fair Play Was Justified

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in 1971 Peter Sloane published an

article titled the economics of

professional football the football club

as a utility Maximizer it laid bare the

ideological differences between the

North American and European sporting

cultures in the United States that

always been an assumption that sports

teams should be profit maximizers and

therefore be organized as closed leads

to protect the sports clubs against the

economic penalty of relegation

conversely in Europe where leagues were

open and had promotion and relegation

utility maximization the desire to

prioritize sporting success was the true

objective profit or underwriting losses

was only important insofar as it was

necessary for a club's long-term

stability and survival and this economic

concept is the bedrock behind the

implementation of financial fair play

now there have been various examples of

owners in England that have tried to run

football clubs as profit maximizers Alan

Sugar a notorious businessman tried his

arm at running his beloved Tottenham

Hotspur as a profit maximizer and looks

back on the experience as having wasted

ten years trying to do something great

for that football club from 1991 to 2001

sugar ran Spurs within their means most

of their fans hated the period with a

leak up being the solitary trophy in a

period of mid-table mediocracy the club

only managed to make two million pounds

a year in profits over the first six

years which was much less than their

local rivals Arsenal who were competing

at a much higher level importantly

sugars ownership illustrates a paradox

in running a football club as Stefan

zamansky and Simon Cooper described in

their book soccer nom --ax when business

people try to run a football club as a

business then not only does the football

suffer but so does the business in an

open system of promotion and relegation

utility maximization is the only way to

survive that being said without

financial regulations football clubs are

at risk of overextending to the point of

threatening their existence and a

classic example of this is Leeds United

in 2001 the club reached the semi-finals

of the Champions League and were one of

the more consistently competitive teams

in the Premier League under the guidance

of Chairman Peter Ridsdale

the club had taken out a number of loans

against

prospect of achieving Champions League

football which they narrowly missed out

on in 2000 2001 and the following season

due to consecutive seasons without the

Champions League revenue the club was

unable to repay their loans and were

forced to sell valuable assets such as

Rio Ferdinand to Manchester United with

leads leaking players due to their debts

on pitch performances suffered and the

club plummeted out to the top-flight

leads failed to stop the rot in the

championship and were forced to

dismantle the squad further and sell

both their training ground and their

stadium in 2004 the club finally entered

administration in 2007 were given a

10-point deduction for failing to

control their finances and were

relegated to the third division for the

first time in their history the Leeds

fans can feel comfort in the fact that

they are far from alone in fact between

the year 2000 and 2008 42 football glee

clubs entered administration 17 in 2002

and 2003 alone in reaction to this

plight of poorly managed football clubs

an inquiry was held in the House of

Commons Culture Media and Sport

Committee into the governance of English

football in 2011 and 2013 two of the

leading sport economists present Stefan

zamansky and Sean Hamill had opposing

views on a habitual loss making off

football clubs zamansky argue that a

lack of profitability didn't actually

matter considering that there was always

a new owner ready to step in and pick up

the bill Hamill however stated that

financial instability led to the

cannibalization of the rest of the

sporting pyramid to pay increased wages

citing the case of Glasgow Rangers in

the SPL there was also the moral issue

of tax payers effectively picking up the

bill for mismanaged football clubs when

a club is put into administration the

football creditors rule ensures that all

football related debts eg to the players

coaching staff and to other clubs are to

be paid first and in full this

essentially means that the taxman is one

of the last creditors to be repaid their

debts an HMRC typically only receives

between five and ten percent of what

they are actually owed equally

problematic is the fact that despite

going into administration football clubs

very rarely go extinct in 2002 Leicester

City went into administration and paid

HMRC 700,000 pounds

seven million owned 14 years later

Lester won the Premier League while the

country reveled in the underdog story of

the century it is worth contemplating

how heroic the story really is the wider

context of European football's finances

is equally important to understanding

why regulation was necessary in the late

1990s European football club revenues

dramatically increased thanks to the

rise of pay-per-view TV the bossman case

however allowed players to have more

bargaining power meaning that the

increased revenue largely translated to

an increase in player wages in an

interview with the BBC Alan sugar

described this phenomenon as the prune

juice effect when discussing the Premier

League's new TV deal if anyone knows the

effect of prune juice it's very simple

it goes in one end and comes out the

other and that's exactly what's going to

happen with this money with larger sums

of money in the game the risk of

financial mismanagement was much higher

professor econ frank summarized the

situation in the end managerial moral

hazard and rent-seeking tend to be

infinitely repeated games in a league

where the expectation of being bailed

out had become part of the collective

experience the potential arms race

mutates into a zombie race where the

entire league operates on the verge of

insolvency chronically expending more

than its earnings but being

systematically rescued by external money

injections year after year and the real

threat from UEFA spointer222 thousand

and eight the european governing body

came to two conclusions firstly but this

chronic loss-making was not sustainable

and the threat of a breakaway european

super league with no promotional

relegation was increasing with the big

clubs growing tired of chronic loss

making well the answer a form of

financial regulation which is

effectively a soft salary cap to control

club expenditure and turn clubs into

reasonably stable institutions and UEFA

called it financial fair play

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