Thursday, February 11, 2010

Stupid Questions Part 4: A Response to David Conn and Lord Mawhinney

A few things to mention on the last post before I go on: while I compared the NFL to the Premier League, many of the structural peculiarities of the latter are not obviously limited to the top flight.  I think it's important this issue broaden out to English football as a whole. 

I should also stress that club debt is not bad per se; obviously, few businesses could operate without some level of manageable credit.  What is bad is the sort of debt that leads to insolvency, or failure to pay taxes (or indeed St. John's Ambulance).  I think that much is clear.

Pitch Invasion has been collating some stories the past couple of days that tie in to this discussion, so I'm going to reference some these pieces to work in some questions about commonly held solutions to the problem of insolvency in English football over the next few posts

Yesterday's Sweeper quoted David Conn's article on the failure of several clubs to pay taxes owed, the sort of final death throe before insolvency.  There are two key paragraphs I want to pick apart a bit:

Yet the very appearance of two of football's bigger clubs – and Southend United – who continue to receive millions of pounds in TV and other income, in a court where scores of small, hard-hit businesses will be wound up today, has concentrated minds again on the game's inability to balance the books, even in this boom time.

Since 1992, the year the Football League's First Division clubs broke away to form the Premier League, and therefore not share their TV rights bonanza with the other three divisions, Football League clubs have fallen into insolvency a staggering 53 times.
   
Conn is clearly insinuating that the Premier League's split from the Football League and their exclusive access to the television rights money bonanza have led to smaller clubs going out of business.  That being the case, as he implies in the first paragraph, the bigger clubs—Cardiff and Portsmouth—should have better balanced their books considering the income they received in television rights that their lower league counterparts could not enjoy.

I'm happy to accept both these claims, except Conn mentions something later in the piece that hints at a problem which is often dealt as a separate issue when discussing money problems in football: the "football-creditors rule."  I'll let him explain:
Compounding this embarrassment is football's insistence that when a club is bought out of administration while "ordinary" creditors have to accept a fraction, often a 10th, of what they are owed, other clubs, and players, must be paid in full.
 Both the Premier and Football leagues justify this, the "football-creditors rule", by arguing that it preserves competition by preventing a club signing players from other clubs then not paying for them. The priority given to football debts explains why the Premier League withheld Ports­mouth's £7m January TV payment and some of the £5m fee from selling Younes Kaboul to Tottenham, then used the money to pay other clubs, while Pompey's £7.5m tax and VAT bill was left unpaid.
As Conn goes on to write, Her Majesty's Revenue and Customs (the tax man) hates this rule because it means the football league will force a club to pay the full price for a player before it pays the government the massive tax deducted from fat wage packets, which in turn leads to things like winding-up orders which is not very nice for the club or the fans.

Again, Conn knows his stuff.  But he frames this discussion in terms of "overspending on players." He quotes without an indignant Lord Mawhinney, the Football League chairman: 
 "People try to find excuses about why clubs have had to go into administration," Mawhinney said yesterday. "One of the sadnesses is that there is never enough recognition of the small businesses, the taxpayer, and worthy groups like St John Ambulance who are left owed money after doing business in good faith."
Mawhinney has publicly backed a salary cap for many years, but the clubs have rejected it because they want the freedom to push for promotion. He added: "A number of clubs over the years have effectively used HMRC as another banking facility. I'm pleased that our new arrangement with HMRC makes that much less likely in the future."
Note that Mawhinney frames the issue as greedy guts clubs wanting to go after promotion, but doesn't acknowledge that some clubs might not want a salary cap to prevent them from spending on players to stay up.  And that failure to stay up in a particular league could lead to financial peril as well, especially at the higher tiers in the Football League chain, issues I mentioned in my post on Tuesday. 

Transfer fee and wage inflation may have been in part spurned by the Premier League money bonanza (in confluence with a number of other factors, notably the Bosman ruling), but that does not automatically mean clubs with access to that money can afford to pay the going rate for good players and stay in the Premier League at the same time.  Wage inflation is an enormous issue in football and shouldn't be dismissed simply by saying "we proposed a salary cap but the greedy-guts clubs said no."  The very fact that "a number of clubs" are pocketing wage packet tax deductions to pay their creditors goes to show that "a number of clubs" are spending an unhealthy percentage of revenue on player wages.  It's not limited to "badly-managed" clubs; buying players often helps guarantee that revenue will be there in future years i.e. to help the club stay in the Premier League and keep getting that TV money.

This is not a defense of Portsmouth, who were undoubtedly poorly managed (and you can blame Harry Redknapp if it makes you feel better, but it hardly matters now).  But in some ways focusing on Portsmouth's recent troubles, and using them as an example of bad management and club avarice, is a distraction from the wider problem of clubs often having little choice but to spend a lot of money on player wages or face the prospect of either no future progress or a slow decline. 

Mawhinney would be justified in his stance if football were a mere circus act, but football is by its nature a competitive sport.  A club that languishes in the centre of the strictly anti-insolvency provisioned Conference, carefully managing its finance and seeking to develop local talent rather than buying big players, will no doubt be in good financial standing.  But what is that club for?  It's best players poached by bigger clubs at below market prices, attendances static or dropping for the lack of progress, because at the end of the day the game has to be about winning.  Or at the other end of things, you could have a Hull that gets promoted to the Premier League to enjoy some of that sweet TV money, doesn't spend on players to avoid irresponsible debt, and goes straight back down to the Championship and doesn't get the TV money until it pops back up again.  Again, this strikes at the heart of the matter: that sporting competition and finance are intrinsically linked.

Conn notes at the end of the article that the FA has been silent "...on the wider financial problems convulsing the game, from the combined £1bn debts ladled on to Manchester United and Liverpool by their US owners, to Portsmouth's meltdown, Crystal Palace going into administration, Peter Ridsdale's struggles at Cardiff and the other clubs consulting the A‑Z for directions to the winding-up court..."  But he ends essentially by blaming the exclusive money pile that is the Premier League TV deal.  So my stupid question is, would things be any different if the £1.78 billion was distributed throughout the Football League?  Would players be more affordable, or would transfer fees and wages rise accordingly? 

1 comment:

Ole Gunner said...

This seems an over-elaborate argument from you.

Fraudsters might sometimes have legitimate reasons to defraud but it doesn't remove from view the fact that fraud is undesirable.

Ditto having £1 and spending £1.2 on wages and transfers as some clubs have done.

If you don't have the means, you don't have the means.

It is especially dangerous football if, as is going on now, it is sustained over a long period of time.

The one thing I worry about in your post is the logic of; "many clubs are doing it so there's a reason for it".

It's self-defeating logic. The reason there's a need for a salary cap is to end the race for the bottom in which every club tries to outdo the other by spending more. It will, of necessity end in disaster.

David Conn is exactly right to frame it as overspending.

By any measure, other than your sensitivity, it is an apt term. Clubs have spent more on buying players than they've taken in. By definition they've overspent.