Andrea Traverso is Uefa’s director of research and financial stability and as such is charged with regulating the current and post Covid-19 financing of football clubs participating in Uefa licenced competitions – the Champions League and the Europa League plus next year the Europa Conference League.
The current Financial Fair Play regulations look at the club’s financial performance over the previous three years, limiting investment and player expenditure of clubs through the “break even” rule. Whilst it has plenty of critics in terms of creating a glass ceiling and has been deliberately ignored on several occasions by a number of clubs, in the normal times of the past the regulations whilst not perfect brought a semblance of compliance to European football, something very different from what preceded it. It is also a regulatory system that Uefa collectively have taken great pride in and in my opinion will be extremely reluctant to dissolve all together.
Liquidity crisis at many clubs
Speaking at a meeting between Uefa and the European Union, Andrea Traverso stated “Covid-19 has generated a revenue crisis and had a big impact on the liquidity of clubs. This is a crisis which is very different from anything we have had to tackle before. In such a situation obviously clubs are struggling; they have difficulties in complying with their obligations.
The pandemic represents such an abrupt change that looking to the past is becoming purposeless.”
“So maybe the rules should have a stronger focus on the present and the future and should definitely have stronger focus on the challenges of high levels of wages and the transfer market.
The assumption that a change in rules would bring a relaxation was challenged “Rules can be different, sure, but this does not necessarily mean that the rules will be less stringent. On the contrary, when severe situations occur often those necessitate stronger measures.”
Whilst financial fair play has its critics within the game there is also a lot of concern that the absence of financial regulation would present an open goal for state owned/oligarch owned or sovereign funded clubs to press home the enormous financial advantages provided by their owners. A unregulated arms race would reduce competition not increase it.
Given the uncertainties regarding future income streams from broadcasting, commercial revenues and also the collapse of the transfer market in Europe (player trading has been a hugely important source of profit in recent years, covering operating losses) perhaps the emphasis will move more towards the strength of a club’s balance sheet rather than as is currently the case, the profit and loss account. Even well run clubs currently face the dilemma of falling income and largely fixed costs (in terms of player contracts and amortisation costs) thus creating significant losses.
Use of the balance sheet
Indeed the European Club Association president, Andrea Agnelli of Juventus, has called for regulations to look not at profit and loss but instead “on the balance sheet and having those criteria met medium and long term”.
The unanswered question in this approach is whilst allowing for recapitalisation following enormous losses with the current problems caused by Covid-19, how do you stop the very wealthiest owners from continuing investment in players and wages (maintaining their competitive advantages) if the focus is taken away from the P&L, without placing capital restrictions on clubs. The only conceivable solution would be transfer and wage caps. That might be viewed as a constraint of trade and difficult to achieve.
So what does it mean for Everton?
Given our absence in European football, currently not a lot. However let’s assume that we meet our objectives and qualify for European football next season. At that point we become subject to whatever rules Uefa have in terms of financial fair play. However, does this mean we get a free pass for our financial performance in previous years when it can be showed we were not compliant with the “break even” requirement. One would imagine that competing clubs would raise more than an eyebrow if (with them being compliant or largely compliant sans Covid impact) a competitor would escape scrutiny due to a change in regulation.
Profitability and Sustainability Regulations
However there is another issue relating to Everton – the Premier League Profitability and Sustainability regulations (rules E.45 to E.53 in the Premier League Handbook).
Similar to Uefa, these rules look back at past performance of the profit and loss account, in normal circumstances, an aggregate picture over the previous three years. As a result of Covid-19 these rules were amended and the current regulations will look at the profit and loss accounts of 2017/18, 2018/19 and an average of 2019/20 (actual) and 2020/21(projected).
As the rules stand, losses of up to £105 million (with a number of adjustments) are permitted. Even if future Premier League regulations changed along similar principles as to the as yet undetermined changes to FFP, scrutiny of past performance under current rules would still apply.
The calculations allow for certain adjustments, including
- Depreciation and/or impairment of tangible fixed assets & amortisation of goodwill (not players’ registrations)
- Women’s football
- Youth development
- Community development
- Covid costs for 2019/20 and 2020/21 – lost revenues and exceptional costs directly attributable to the pandemic
Thus, albeit with a fairly high margin for error, it should be possible to calculate how close to the profitability and sustainability limits Everton are. The importance of this is that this will drive our ability to spend in the transfer market this summer (assuming capital is available to do so)
Published accounts for the periods 2017/18, 2018/19 and 2019/20 show losses of £13.1 million, £111.8 million and £139.9 million respectively. My own projections for 2020/21 forecast losses of £149 million (before any player trading that may take place in June). This would give an average of £144.5 million over the two years prior to the permitted deductions. Thus the aggregate losses before deductions would total £269 million.
The accounts do not provide details of the amounts spent on the academy, women’s football & community development. They do provide the Covid-19 impact for 2019/20.
In total, I forecast Covid costs of £102 million, academy costs of £24 million, women’s and community costs of £21 million plus £17 million of depreciation to be deducted from the forecasted aggregate losses of £269 million.
By coincidence that gets us to a figure of £105 million of losses after permitted deductions. Now I accept entirely that there is a significant margin of error in the estimates, but on the basis of reasonable accuracy they demonstrate how close to breaking the permitted maximum losses Everton are even after taking Covid-19 etc into account.
If we are close to or exceeding the maximum permitted losses one solution would be player sales to generate player trading profits. The Premier League transfer window opens on June 9th 2021, three weeks before the end of our financial year end.
The impact of changes to financial fair play
Thus changes to Uefa financial fair play rules in the summer might create the expectation of a period of excessive spending across Europe, allowing some clubs to create a competitive advantage given their owners’ willingness or ability to provide capital. In practice that capital will firstly be used to cover losses (which are currently financed largely through short term debt from banks and other lenders). Those with strong enough balance sheets might be in a position to acquire player assets relatively cheaply, however that will depend on what constraints any new regulations might bring to transfer and wage expenditure.
For Everton specifically, our ability to be more active as a result of regulatory change will depend not only upon any changes made, but whether those changes are reflected within the Premier League regulations and critically have we remained compliant to the previous regulations? It should be remembered that no club has ever previously failed to comply with profitability and sustainability limits.
Finally we must consider Moshiri’s willingness to continue funding. Whilst he has given no indication of an unwillingness to spend, the underlying difficulties of having an existing cost base way out of kilter with the levels of income generated by the business must be a factor, from a regulatory and commercial perspective plus, of course, in the context of the building and financing of Bramley-Moore.
In my opinion, expectations of a summer of significant spending are wide of the mark and do not reflect the position of the club even if regulations change.
Categories: Everton finances