x Abu Dhabi, UAEMonday 24 July 2017

Will the Premier League heed the warning signals?

Mounting debt in the Premier League provides a cautionary tale, and many clubs appear to be paying attention, writes Paul Radley.

Curious thing, football. On the one hand, egomania, rampant greed and short-term thinking regularly push the community institutions that are English football clubs to the point of bankruptcy. Yet on the other, there is no safer game to be in. As the authors Simon Kuper and Stefan Szymanski suggest in their book Why England Lose, football clubs tend to be "more secure than the Bank of England". Of the 88 clubs playing in England's four divisions in 1923, only three were not in existence by the start of the 2007/08 season (South Shields, New Brighton and Aberdare Athletic), a success rate unparalleled elsewhere in the business sector.

Even Portsmouth have managed to cling on, however grimly. Earlier this month, the fallen South Coast club won a High Court ruling meaning they will soon be free from the shackles of administration again. To coin a footballing term, they have shown remarkable bouncebackability. According to the most recent analysis by Deloitte's Sports Business group, the Premier League clubs racked up a combined debt of £3.3 billion (Dh19bn) between them by 2009.

However, despite that very few turn a profit - indeed, they are often models of extreme financial incompetence - it seems football clubs actually are "too big to fail". This is the phrase financiers use to describe a business that has become so large and ingrained in the economy, someone will always step in to prevent its failure. It is usually applied more readily in relation to the banking sector crash and the ensuing global financial malaise. But there are parallels to the case of little old Pompey, and the likes of Leeds United and Sheffield Wednesday before them.

If a large company fails, the knock-on effect will often be so disastrous for employment and related business, that someone is sure to bail it out before the worst happens. As such, the company believes itself to be fireproof, and hence has leeway to spend as recklessly as it wants. In a football club's case, their monopoly of the local economy is usually absolute, given the unstinting and unconditional faith of their supporters.

Brand loyalty may have a shelf-life in other industries, but not football. For instance, whatever mess Portsmouth got themselves into, their supporters would never consider decamping down the road and following Southampton instead. With that support guaranteed, and delusions of grandeur thanks to the global exposure they get from playing in front of a massive weekly audience in the Premier League, the club overstretched its means.

They went to the FA Cup final twice, in 2008 and 2010, yet proceeded to spend vast sums of money they did not have. And they set a record for bail-outs in the process. Ownership of the club changed hands four times last season. Now, the administrator is apparently due to sell the club to Balram Chainrai, a Hong Kong businessman, who was not put off by his initial involvement with the club. "I think Portsmouth will be a watershed for reckless extravagance," Terry Robinson, the former chairman of Sheffield United who is now a consultant to Stoke City, the English Premier League side, told The National.

"They have had many years of problems going back as far as the late 1980s. These problems been papered over by a legion of new owners. "Portsmouth's success on the field also gave supporters a laissez-faire attitude to ownership." Portsmouth have become a significant cautionary tale, which the rest of English football would do well to heed. Signs suggest that some already are. On the eve of this season, Martin O'Neill walked out on his job as manager of Aston Villa after Randy Lerner, his chairman, asked him to address the disparities of the club's balance sheet.

Villa's annual wage bill of £71 million (Dh408m) is 85 per cent of the club's turnover. Lerner deemed that unsustainable. "[O'Neill] knew full well about the need to bring wages in line with revenue," Gen Charles Krulak, a non-executive director at Villa Park who is considered to be Lerner's right hand man, said on a Villa supporters' message board. If the Villa case is a template, then even supporters now seem to be coming around to the idea of fiscal obedience.

There were no protest marches for O'Neill, who was perceived to be one of the most popular figures in Premier League management, when he quit. Indeed, fans on the Holte End at Villa Park even chanted the chairman's name during their win over West Ham on the opening day of the season. "Although I want Villa to win, I want the club to stay solvent and survive," one fan was quoted as saying after the game. "I run my own business, and you can't ignore the bottom line."

Lerner is not being a Scrooge for no good reason. Other than the very obvious folly of unsustainable operating costs, clubs that are debt-laden will soon be excluded from European competitions, as per new Uefa regulations. Michel Platini, the former France playmaker-turned-Uefa president, is staunchly against debt in football. In the spring of 2009, he sent a Uefa delegation to the United States to study how competitions such as the NFL and NBA are run. His objective was to work out how to promote uncertainty in competition on the field, yet secure financial control off it.

Earlier this year, European football's governing body passed a new mandate for "financial fair play" that requires clubs to break even over a three-year rolling period. Each club must pay their players and other costs from money they earn from television, sponsorships and ticket sales, and not through the largesse of rich benefactors. According to Platini, it was owners such as Roman Abramovich (Chelsea), Silvio Berlusconi (AC Milan) and Massimo Moratti (Inter Milan) who asked for the regulations to be introduced, so they are not subsidising their clubs ad infinitum.

Clubs that breach the rules, which will come into force from the 2012/13 season onwards, will not be granted a licence to take part in European competitions. That may sound like a limited threat, but many of the game's leading clubs rely heavily on the riches on offer in Uefa tournaments. If Platini's vision is borne out, there will be no deficit at European clubs by 2017. "What Uefa is proposing is very sensible, the regulations have been in the making for a while and appear to have thought of most things," a former finance director at a Premier League club said.

"They are currently only concerned with the grant of a Uefa licence, not to compete in the Premier League, [but] I do expect that the Premier League will apply these rules to themselves. "If the Premier League does apply the rules then the next question would be as to whether clubs being promoted from the Championship would have to comply before promotion or once in the league." Promotion to the Premier League is now estimated to carry with it a £90m (Dh517m) bounty. However, it is also one of the most perilous transitions in football - even with the promise of £48m guaranteed parachute payments if relegation ensues.

Take the case of Watford, the Hertfordshire club who have frequently yo-yoed between English football's top two divisions. In 2008, Deloitte rated them alongside Reading and Arsenal as one of the three most profitable clubs in the Premier League. Yet last season, by which time the club were ensconced back in the Championship, they were only saved from entering administration by 11th-hour investment.

So what went wrong? "Egos, personal greed, and the wealth of the Premiership from TV money has been a major attraction for people wanting to get rich quick," said Steve Simmons, Watford's former finance director. "Fans give their allegiance unconditionally, but also are so shortsighted, not to mention gullible. How often do you hear it said: 'Get the chequebook out'? "There are insufficient curbs set by the League. This is a mutually advantageous gravy train. Why does the League or Premiership not insist all transfers and agents fees are paid up front?"

Simmons' former club, Watford, share the same plot of land for training as Arsenal, the Premier League giants. It is not the only thing the two clubs have in common. Like Arsene Wenger, whose reticence in the transfer market frustrates some Arsenal fans yet has left the club in rude financial health, Malky Mackay, the Watford manager, is also a trained economist. "Some clubs are staving off the inevitable by trading month to month and living month to month," Mackay was quoted as saying on the eve of this season. "I would imagine some are trading insolvently."

But so what if they are? Between 1992 and May 2003, 40 of the 92 professional clubs in England had been involved in insolvency proceedings. Yet they all made it through and carried on operating. Given his grasp of economics, it is unlikely Mackay will be bullying his board into excessive lending, even if there is apparently an invisible safety net. That was not the case with previous regimes, according to Simmons. "Given the characters involved in some clubs, unlike most public companies with appropriately convened boards and non-executive directors, it can be quite uncomfortable for a finance director," he said.

"That was certainly the case for me at Watford. Eventually resignation becomes the only option if you are serious about your responsibilities. "The manager at Watford, Ray Lewington, was a really decent guy, so that wasn't a problem. "Clearly though, managers want to spend money the clubs may not have and will blame results on lack of resource, sometimes fairly, sometimes not. The manager in such a case prefers to portray the club as small, punching above its weight."

pradley@thenational.ae