House of Sad

Every now and then I like to go off-piste and look at issues in the world of football, partly because it interests me but also because it is an area ripe for economic analysis (bear with me on this, there is some economics in here). A couple of years ago, I looked at the financial position of Newcastle United, the club I support. I reluctantly concluded that although the financial model adopted by the owner Mike Ashley was condemning the club to mediocrity, this was consistent with a strategy in which the owner had no incentive to spend huge sums of money for no guaranteed reward. However, this was inconsistent with the demands of fans who want to see the club spend money in order to challenge for trophies, rather than simply making up the numbers. Perhaps the relationship between owner and fans can be seen as a principal-agent problem in which the owners’ actions on behalf of the club impact directly on the fans. 

The news earlier this year that a Saudi Arabian consortium was interested in buying the club was welcomed by fans who hoped that it would allow Newcastle to challenge for trophies on the domestic, and perhaps even European, stage. The group included Saudi Arabia's sovereign wealth fund PIF thus making a direct link to the Saudi government whose record on human rights is, to say the least, questionable. This posed an ethical dilemma for me. Obviously I want my club to be successful which would have been enabled by the funds PIF has at its disposal. Against that I am uncomfortable with the links to a government deemed by Amnesty International as repressive. As it happens, the dilemma was resolved yesterday when the consortium withdrew its bid for the club.

It appears that the Premier League (PL) had dragged its feet in applying the “fit and proper person” test to the prospective owners and 17 weeks after the bid was submitted, the consortium simply lost patience. Quite rightly the PL wanted to determine the precise links between the consortium and the Saudi government. It needed assurances about who would have control (who is the beneficial owner), where funding would come from and who would appoint the board. In the absence of clarification, the PL’s rules prevented it from sanctioning the deal. On the surface, you might think that this was a case of good governance in action. But the PL – and indeed the English Football League, which governs lower leagues in England – has a murky record. Consider these examples:

1. In 2003 the PL welcomed Roman Abramovich's takeover of Chelsea FC with open arms. Not once did they publicly ask how he obtained his money. Nor did they raise the issue of money laundering, despite the fact that any business funded by funds of dubious provenance is a classic money laundering risk.
2. In 2005 the PL was quite happy to allow the Glazers to purchase Man Utd, despite the fact they loaded the club with huge debts in the process. Those debts are currently valued at £0.5bn – almost 0.8% of the annual gross value added generated in Manchester.
3. The PL welcomed Thaksin Shinawatra as the buyer of Man City in 2007. Thaksin, being a former PM of Thailand who was deposed in a coup, is the sort of politically exposed person whom people in finance are warned to treat carefully in any financial dealings. Thaksin then sold the club to the Abu Dhabi Investment Group, owned by a member of their royal family. The club was recently charged with breaching UEFA's financial fair play regulations (and dubiously acquitted), yet we did not hear anything from the PL on the issue.
4. If it is Saudi involvement the PL is concerned about, there seem to be no worries that Sheffield United are owned by a Saudi prince who recently won a court ruling that he could purchase a 50% stake in a club reputedly worth £100m for just £5m. 
5. Lower down the leagues, the football authorities claim to have a 'fit and proper' person test. Yet Wigan Athletic was last month declared bankrupt just four weeks after it was sold to a Hong Kong based consortium.
6. The travails of recently-promoted Leeds Utd can partly be laid at the PL's door. They raised no eyebrows when in the early-2000s the owner borrowed against future revenues to load up the club with debt, predicated on the basis it would regularly qualify for the Champions League. It didn’t and predictably Leeds went bankrupt. It then went through a series of owners which culminated in the farce whereby Massimo Cellino took control in 2014 only after winning a challenge to the Football League's attempt to block him. Cellino was later banned for financial irregularities before being allowed to return to his post. You almost couldn’t make it up.

I could go on. Fans of football clubs with long pedigrees such as Blackpool and Portsmouth can tell similar tales of woe in which unscrupulous owners managed to take over clubs before subsequently ruining them. On the basis of their past record of "anything goes" there are calls for the PL to be more open about why they put obstacles in the way of the Saudi takeover, without ever explicitly saying they failed the ownership test. Has it discovered a moral conscience, in which case I fully expect that this won't be the last occasion that club takeovers are blocked? Or is it because the Saudis have blocked the PL from taking legal action against the broadcaster beoutQ for illegally streaming matches whilst simultaneously blocking the PL’s licensed broadcaster in the Middle East?

In effect, football is being run along casino capitalism lines: The very behaviour which voters condemned banks for undertaking prior to the Lehman’s bust is alive and well in football. It has been well established in finance that self-regulation does not work – there is always an incentive for someone to game the system to their advantage. The same is true in football club ownership. To the extent the owner is running a business, there needs to be a systematic set of rules which proscribe what owners can do and penalties which are consistently applied in the event they are broken. Football’s regulators could do worse than learn from the financial regulators, which have been open and transparent about what institutions can and cannot do, and which crack down hard on miscreants. There should also be a separation of the financial incentives of the PL and those of the top clubs. Regulators are there to regulate, not to get rich on the back of those they are meant to oversee.

My favourite quote from the book by Simon Kuper and Stefan Szymanski Why England Lose … (aka Soccernomics) is “just as oil is part of the oil business, stupidity is part of the football business.” But it should not be this way. If football people want to be treated as the professionals they say they are, the sport needs to be regulated properly. Not run in the capricious manner which benefits the rich owner at the expense of the less well-off fan.