McCormick’s Craic: will financial restrictions level the Premier League playing field?

There was a time, when Sunderland was known as “The Team of All Talents” and upset the footballing authorities by flouting the financial restrictions in force at the time. Later they were “The Bank of England Team” and you can bet that the fact the players were subjected to a maximum wage didn’t stop them from getting a few extras. From a fan’s point of view the ultimate aim of running a football club is easy. We want to see our team winning trophies, playing attractive football and signing the players to achieve that end. Every transfer window, and the times in between, sees amateur pundits with their wish lists, advising the club that such and such a player will strengthen the squad and perhaps berating the manager or owner for not signing some star name or another. But it’s not that simple. Clubs like Sunderland can’t always go out and pick a player with the ease that they could find a frozen lasagne at Tesco, although judging by some of the carthorses we have signed in the past you might not think so. There are many reasons why it isn’t so simple, fees and wage just being part of the package. What is clear is that over the past decade or two it has become harder for clubs to break into the elite band which may just challenge for the title. John McCormick has been looking at the implications of financial restrictions about to come into force and whether or not it will succeed in making the Premier League more competitive.

 

Earlier this month the Premier League reached agreement on spending controls and financial restrictions for all member clubs. Apparently Ellis Short started the ball rolling with a proposal on wages which the majority of the Premier League’s chairmen received favourably.

One school of thought is these measures were brought in to provide a more level playing field and keep the Premier League relatively balanced. If the gap between top and bottom gets too wide the League will become more predictable and therefore unattractive. Comparisons were drawn with American sport, where various leagues take steps to ensure no club or clubs are allowed to permanently dominate.

Given this and our Chairman’s leading role you might expect Sunderland to benefit but I’m not so sure. I don’t think it will make any difference to ourselves or to the so-called “big clubs”, which will carry on as if nothing has happened.

The restrictions comprise a “Long-term Sustainability Regulation” and a “Short Term Cost Control Measure”. From next season until 2015/16 Premier League clubs will not be able to make an aggregated loss in excess of £105million and clubs with a player wage bill in excess of £52million will not be allowed to use more than an additional £4million from PL Central Funds ( TV rights money) to increase player wages. The wage bill limits and allowable increases will each rise by £4 million per season until 2015/16.

Let’s look at a few clubs to get the picture before we move on to Sunderland.

Man Utd have an annual player wage bill in excess of £52 million. Depending on the website you visit you’ll find it starts at about £80 million and goes beyond £100 million. This is one club that will find it can’t use much more of the PL central funds to pay increased wages. However, Man Utd is a massive cash generator in its own right so PL restrictions are irrelevant. A club with annual match day revenues of about £100 million will be able to buy players or increase their wages without falling foul of the Premier League, and matchdays aren’t United’s only source of cash. They also do well out of international marketing, sponsorship and participation in the Champions League. Usually this is enough for them to show an annual profit but in 2011-12 they posted a small loss after a poor season. A 3-year loss of £105 million seems unlikely, so there’s no worry about breaching the “sustainability regulation” either.

At the other end of the Premier League “PL central funds” make up about 88% of Wigan’s revenue. Wigan spend about 75% of this on players’ wages but, at about £40m, wages don’t reach the £52 million ceiling. Wigan are therefore going to be unaffected by the cost control measure. The long term sustainability regulation also appears to be irrelevant. Wigan posted a profit of £4.3m for May 2011-May 2012 after a small loss (£7.2million) the previous year and larger but decreasing losses before then. They also won’t run up £105 million of debt in the next three years and therefore won’t be subject to any of the sanctions the league can impose.

QPR might offer a different picture of life at the bottom. They had wages of £29.7 million, turnover of £16 million and an operating loss of £25.7 million in their promotion season. That’s a wages to turnover ratio of 183 per cent. Finances will have been aided by promotion but they finished below Wigan and have a small ground so income, although likely to be higher than Wigan’s because of higher prices, will be still be low by Premier League standards. Yet they signed 31 players in 18 months, some allegedly on high wages, and even with ten on loan they have too many players for a PL squad. Continuing a policy of trying to buy survival could lead QPR to accumulate such big losses or pay so much in wages they fall foul of the new regulations, assuming they do stay in the premiership.

Sunderland are somewhere between these extremes. I don’t have recent figures but last March “The Journal” reported that Sunderland was on track to meet EUFA’s Financial Fair Play regulations. The club had posted a loss of £7.8 million, a 72% reduction from the previous year’s losses (£28 million). Margaret Byrne was quoted as saying there were plans to reduce the wage bill through more creative contracts and incentives, with a target of reducing the wage to turnover ratio from about 76 per cent (it was 82% a year earlier) to a much healthier 60 per cent.

Overall, therefore, it looks as if the club has not been doing too badly in controlling losses and wages and is heading in the right direction. This can only be for the good. But while it looks as if SAFC are likely to stay under the £105 million of allowable losses what about the £52 million salary cap? The Journal article estimated players’ salaries were in the region of £60million, significantly above the £52 million ceiling. Since then, of course, we have lost some expensive players and we haven’t signed many to replace them. If the wages to turnover ratio has decreased to 65% (revenue has increased, as you’ll see in a future post, but we’ll ignore it for now) the player wage bill will be £51.6 million, just under the limit. Even if the club breached this limit I don’t think there’d be serious cause for concern. We generate about £15 million from match day income and at least another £15 million from sponsorship and commercial activity. Not in Man Utd’s League but it will help with the wages.

It appears that the Premier League has come up with regulations which will not impede those clubs taking steps to control spending but which will target clubs living beyond their means. This does not mean, however, that careful clubs will benefit; regulations and sanctions are not the same thing. Consider a scenario where a club as well run as Wigan goes down while one with QPR levels of spending stays up. Would the Premier League reverse this decision? I think not, and nor could I find provision for points deductions for clubs breaching the regulations. Careful middle-sized clubs are still not protected from clubs which use money they haven’t earned to buy Premiership survival. Nor are they helped to compete against rich clubs which use their financial power to maintain their status.

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And that’s without considering debt. Borrowing and repaying is part of everyday commercial enterprise. It isn’t necessarily unhealthy. However, it can be argued that clubs which go into debt to buy players or pay wages without the income to service their loans are gaining an unfair advantage. The new financial regulations may apply to losses or overspends created by such situations but they do nothing about debt itself. This is no surprise. Man Utd might expect an operating profit but they are some £350million in debt, even after a rights issue. Wigan might be a well-run club but they had debts of £73 million in 2010. Most of this has been converted into equity and is no longer a liability. Ellis short did something similar at Sunderland. When it comes to debt there are a lot of owners living in glass houses, with no right to throw stones at other clubs.

In 2008 John Samuels, an Emeritus Professor of Finance, wrote “The beautiful game is over”. His premise was that football has become subject to international free market forces.  This has brought in a flood of new money but it has not been equally distributed, so some clubs have withered while others have become all-powerful.  Samuels argued that there is a deep reluctance to see the market regulated in favour of greater equality and thus more genuine competition. The Premier League may have started to overcome this reluctance but there’s still some way to go.

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