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Financial Fair Play faces its first big test.

By Tony Attwood

From the moment Uefa’s Financial Fair Play rules were announced it was always clear that there would be an early test of the rules.  It would be a situation so outrageous that even a dead man reading The Sun could spot it a mile off.  A test that would define the entire existence of FFP either as a pointless set of rules that no  one enforce (rather like the goal keeper’s five second handling rule) or something that would turn football upside down.

Now we know what that test will be: it will be the case of Real Madrid and the Madrid City Council.

I wouldn’t claim that Untold uncovered this – of course not, since we don’t have a reporting team in Madrid and another in Brussels, but when the story began to peek out from behind the curtains we most certainly did our bit to let the full glare of the sunshine in.

While most newspapers in Britain have utterly ignored the emerging situation (the Independent was the notable exception) the story has grown.  Now the slightly more serious football media are moving in, pretending that they knew about it all the time.  And slowly supporters who don’t read Untold are waking up just to how big a story this is.

For the fact is that if Real Mad and their friends in the Madrid Local Authority get away with this, then FFP is over before it has begun.

The full background is in the “Football Finance About to Explode” story on Untold.  But here is a quick summary: Real Madrid swapped some land that it owned for land that the council owned (there’s a lot more machinations in the deal than that, but that is it in essence).   The two bits of land were roughly the same size, but the land Real Madrid sold is fairly worthless while the land they received is right by their stadium, and is worth about 100 times the land that the council got in return.

Last week El Pais in Spain pointed out the deal, which looks very much like the Council effectively financing Real Mad.  If they are, then that is against EC regulations, and what’s more the “profit” that Real Mad deny exists, must be shown as an outgoing within FFP.  They can’t even claim development costs back because they are going to build a hotel and shopping mall on that newly acquired land.

So if Uefa let this through, then it is the perfect loophole for all clubs to follow, and Man City will breath a huge sigh of relief, since all their developmental costs of the area around the City of Manchester Stadium can be used to off-set the cost of players salaries and purchases, bringing them into line with FFP requirements.  Man City can then go ahead and continue to spend in the current manner.  PSG the same.  Only Chelsea, who have no development areas, and have had planning permissions turned down by their local London borough, will fail to benefit.

Further, if the Real Mad deal is allowable then councils across Europe will be able to sell football clubs land that they own (playing fields, car parks, old shopping areas etc) at way below the market value, in order to help their town still have a football team, even when the club gets into trouble.

Relationships between football clubs and local government are not always that nice and cosy in the UK, but that is not the case in some parts of the Netherlands, and most certainly not the case in Spain.

The key issue here is that as things stand the swap of land in Madrid does not show on a balance sheet.  It is expressed as an exchange of two areas in Madrid of about the same size.  What that ignores is that one piece is much more valuable than the other – and that it becomes even more valuable still if Real Mad own it because of its proximity to their existing stadium.  That is the basis of local authority support for the club which is actually contrary to EU competition laws.

In order to exist in harmony with EU regulations Financial Fair Play has to rule out the acceptability of state aid.

Now if anyone is going to insist that the EU rules and FFP rules are upheld it is going to be the likes of Tottenham Hotspur and Arsenal because both clubs have stuck by the FFP rules, and Tottenham have received funding only in terms of regional redevelopment costs, to help build up a very run down area.

But for Real Mad this indirect funding of the club through the manipulation of land prices, appears to be a move too far.  It is, of course, not the only example of the state helping them, and so far they have got away with their exemption from the rule that says football clubs in Spain must be PLCs.   Hopefully Arsenal (who like Real Madrid, show a profit most years) has protested to the European Commission on the way that Real Mad is allowed to operate via a set of low or zero tax loopholes while Arsenal cannot.

What makes everything so sensitive about Spain is that their economy has collapsed because of various odd land deals and dubious banking practices, and money has been provided from across Europe to bail them out.  No one is really in a mood to see the capital city’s local council throwing money away by doing crazy deals with the local authority.

But now there is one further issue that is arising.  The person who is investigating these matters (the land deal and the PLC exemption) is Joaquin Almunia – a Real Madrid supporter, and a minister in Spain’s government that allowed the exemption of Real Madrid and three other clubs from the PLC legislation.  Whether he will be able to wriggle out of this one no one knows.

But what we do know is that FFP now has its first test.  If Real Madrid get away with their land transfer scam, then it will be shown to be legal under Spanish law, and as such something that it will be very hard for FFP to claim is anything other than a straight swap of land.   If that is the case, Uefa can hardly claim it is otherwise, and so everyone else will queue up to do the same.

What is even more interesting is what FFP will make of the lease of the Olympic Stadium to West Ham.  It is hard to see how this has been offered at a market rent, and thus it too constitutes state aid.  That won’t matter unless West Ham qualified to play in Europe, so maybe it is not a big problem as yet.  But even if they do qualify West Ham might be able to show that this is a special case because there was no one else who could viably use the stadium.  In which case the problem bounces back to our old chum, Boris, the Mayor of London.

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21 comments to Financial Fair Play faces its first big test.

  • Barndoor Bendtner

    Also on a local political level, it is hard to see that non-RM supporters would be happy with this deal. Throwing away more money they haven’t got when unemployment is up to 25%.
    I love a bot of footie, but to keep using it as a special case legally is plain criminal.

  • Malaysian gunner

    That is why do not put too much faith in ffp. When it comes to the crunch,I bet Platini will blink first.

  • ClockEndRider

    Interesting situation for our German cousins. It would seem that the billions they are throwing at Southern Europe in the vain hope of keeping the European project on track (while at the same time giving them an artificially low exchange rate helping them to export their way out of trouble)will actually be used to sustain football clubs who routinely spend like drunken sailors.
    Doesn’t make for pretty reading with Herren Hoeness, Rumenigge, Beckenbauer and co I’d have thought…..

  • Harry Barracuda

    Nothing new is it? They used the same mechanism to pay for Zidane.

    http://en.wikipedia.org/wiki/Ciudad_Deportiva,_Madrid

  • @babakrdaemi

    Good article as always Tony. Thanks for sharing your knowledge with us.

    I have to ask, when will the financial restraints show? Even with the CL and FA Cup win last year, Chelsea made £1m profit. Yet, they spent £90m on Oscar, Hazard and Marin. They are also heavily linked with Falco.

    Surely they cant afford these players Yet they have them.

    I am confused by the Chelsea seam to continue to spend lavishly and well beyond there means if the rules are due next season?

    Thanks Tony

  • TT

    I think the issue here Tony, more than the land swap is that RM immidietly mortgaged the land to the banks for 100 x value of the old strip of land. If the council insists that this was like for like and the strip they got from RM is in fact worth lot less are we not looking at a possible criminal case?

  • @babakrdaemi

    Sorry for the both grammatically incorrect post above.

    I am in PR amazingly, yet when it comes to Arsenal I am still a 14 year old football nut that cant spell, speak or read due to my mad desire to get my point across

    COME ON THE GUNNERS

  • Colin

    Real Madrid have the royal seal effectively meaning they are entitled to be bailed out by the Spanish government! This was their great dictators final gift to them. So correct me if I’m wrong but on that basis are they not entitled to state aid. And as for the land swap who real cares? Arsenal purchased lands below market rate because of planning grants, rezoning etc.

    This is not the first real test, that’s already happened! Malaga a semi finalist in this years champions league final are out of next years because of financial irregularities. In my opinion Uefa has past it’s first test

  • Norwegian Gooner

    Mark my words.

    What will happen if Real Madrid gets completly out of this one, is that the germans will stop helping their country. They have allready stated that, not in this particular case thogh. This is not Platini vs. Fotball Europe. This is Europe vs. A few rich football clubs. And those clubs will not stand a chance.

  • Amos

    Maybe I’m missing something here but how does this differ in essence from the development of Ashburton Grove? The land was compulsorily purchased and Arsenal profited and are still profiting from the developments on the old stadium and the properties around both developments. A regional development grant is still a subsidy however it’s dressed up but aren’t infrastructure developments outwih FFP anway?. Maybe the land next to Real stadium is more valuable but probably only because it is next to the Bernabeu. Swopping land for local authority use that doesn’t impact on local authority development is just another form of regional aid.

  • Norwegian Gooner

    @babrakadami

    The easy explanation is that UEFA has to verfy the books. Chelsea actually mase a loss of around £13.million last season according to ffp rules if I remember correctly. This is not official yet and the numbers may show different. Because of prejustice, UEFA cant even comment this before they have made their deccision.

  • @babakrdaemi

    Thanks Norwegian Gooner. I fear Chelsea are confident that they have nothing to fear. hence last years expenditure. Even Man City curbed it last year.

    I really fear that once FFP fails, we will see things get worse before they get better. No league will take a stance that is not backed by the wider football community. Why would the Premier League induce rules that will send players to France and Spain?

    Hopefully I am wrong, however, the behaviour of Chelsea last summer and the rumoured activity of this summer make me think Chelsea will spend big this summer with no fear of the repercussions from Europe.

  • Norwegian Gooner

    One Word: EU

    Yes I know Norway are not a member, but we are in a very fortunate possition, so we dont drepend on it. The same can not be said about Spain. There is too much political power behind FFP for it to not succeed, that I dont even consitter it an option. There may be some loopholes and some slack will probably be given during the final implementation period. But i am confident that every loophole will be closed and the sugerdaddy-clubs better give up sooner rather than later if they want to succeed long term.

    My gut feeling is that FFP is the begining of new economic rules across boarders in Europe to ensure we dont enter another financial crisis.

  • Colin, no I think you are wrong on most points.

    Royal seals and all the other parephenalia of the state do not override EU directives and EC rulings. On joining the EU Spain agreed to pull its laws and regulations, including past ones, into line with EU competition directives.

    Arsenal’s purchase of land was at full commercial rates, and came with the demand that Arsenal develop part of the land for housing. Further Arsenal agreed to pay Transport for London for the redevelopment of Holloway Road station. This did not happen because Transport for London changed its priorities, but had they decided to do this, Arsenal would have paid in. If you have evidence of purchasing land below market value, please let us see it.

    The Malaga situation was indeed under FFP, but only the first part of FFP – the part that deals with payment of tax bills to the state. I agree I did not make this fully clear but I was referring to the main body of FFP which covers issues of profitability.

  • Charlie

    Off topic a bit but FFFP will probably result in less transfer activity. Recently the market has been driven by the rich clubs spending stupid money which then enables the smaller clubs to spend. A bit like a stimulus package. What worries me a bit is that Arsenal do need to improve the squad in order to compete for trophies and a less active transfer market is not necessarily what they need. At least there are some good young players coming through. Also it will make it less likely that the star players at Arsenal will be poached by rivals.

  • nicky

    Let’s imagine the status quo here for a minute.
    Madrid has the valuable land near Real’s Stadium. What can they do with it? It’s probably too close to be developed by anyone other than the football club.
    The answer is surely that an independent body decides the relative values of the two parcels (bearing in mind the future destinies of each) with the club being made to pay the City the difference.

  • Stroller

    Ultimately I think that FFP will end in the same situation as taxation is now. Rules are put in place. Clubs (with the aid of experts in the detail) will find ways to work round them. The rules will get tightened, but UEFA will always be playing catch up in much the same way as Governments are having to do with Tax Evasion.

    Because the rules will become more and more complicated to close down the loop holes, it will create a whole new industry for accountants and laywers.

    The principles are right but whether it can be made to work as intented remains an open question.

  • Norwegian Gooner

    @Stroller

    Do you know anything about FFP or are your opinions based on free thinking?
    Football is sports and are basically alowed to create their own rules. If UEFA want to punish a player, a manager or a club because they brake one of their rules, they do it. UEFA can perfectly well CHOOSE who they want to INVITE to their own competitions based on their own set of fair qualification rules.

    Good luck to any accountant or laywer getting a disqalified team in to Champions League! Lets see what happens with Malaga. They are confident they will get their place back.

  • Stuart

    Stroller
    It’s worth remembering that no-one has the right to a place in the Champions league as entrants are actually there on an invitation only basis. That invite doesn’t have to be made.

  • Mike T

    Tony

    To correct you and a couple of others on matters Chelsea

    1 Chelsea have not had any planning application regarding re location turned down. They had made a bid to buy the old Battersea site which failed. They, Chelsea, also objected to plans by a company called Cap Co for the demolition and re development of Earls Court.
    2 Chelsea did not spend £90 million on Hazard, Oscar & Marin the figure was nearer £60 which will be written off in the accounts over a minimum of 5 years.
    3 In 2011 when declaring an accounting loss of about £67 million the loss in FFP terms was only about £7 million (source Swiss Rambler). It is unlikely therefore that in 2012 when showing a small profit that there will be any FFP adjusted loss.
    4 A key factor in FFP is what % of turnover a club pays in wages Chelseas was about 66% in 2012 (down from 84% in 2011)

  • Paul "the Gooner"

    A very good article Tony.If you have been to or near R.Madrids Stadium you will have noticed it is a very sought after area.It is near the financial area of the City.It would sell for “Loads of Money”.A good move i think.