Monday, 24 January 2011

Unintended consequences – could Financial Fair Play kill small clubs’ youth development?

The Telegraph ran an interesting piece last week on possible changes to youth development among Premier League clubs. Suggestions include doing away with reserve team football in favour of an under-21 development league, the end of Centres of Excellence and (possibly) the abolition of the "90 minute" rule that stipulates that youth players must live within a 90 minute commute of their club.

These suggested changes are being considered at a time when UEFA's Financial Fair Play ("FFP") rules are coming into force for clubs seeking entry into the Champions League and Europa League. Together, they could have radical and possibly dire consequences for smaller clubs' youth set-ups. Here's why.

Financial Fair Play – "good" and "bad" spending
FFP has the laudable aim of stopping clubs spending unsustainable amounts on short-term investment such as player wages and transfers whilst allowing unlimited funds (if available of course) to be sunk into longer term activities such as youth development and stadia.

The new rules list what is to be included in the famous "breakeven" calculation. There is a list of "Relevant Income" in Annex X, Part B and a list of "Relevant expenses" in Annex X, Part C. It is the net result when comparing Relevant Income and Relevant Expenses that determines a club's breakeven result. When it comes to youth set-ups, what is important is what is excluded from the "Relevant expenses". Annex X, Part C (g) says (my emphasis):
Expenditure on youth development activities
Appropriate adjustment may be made such that youth development expenses are excluded from the calculation of the break-even result. Expenditure on youth development activities means expenditure by a club that is directly attributable (i.e. would have been avoided if the club did not undertake youth development activities) to activities to train, educate and develop youth players involved in the youth development programme, net of any income received by the club that is directly attributable to the youth development programme. The break-even requirement allows a reporting entity to exclude expenditure on youth development activities from relevant expenses because the aim is to encourage investment and expenditure on facilities and activities for the long-term benefit of the club.
So clubs can spend as much as they want on youth development and none of the cost is included in the calculation of their breakeven figure. Increasing youth expenditure doesn't reduce losses, but for clubs with wealthy owners which are constrained from traditional spending on transfers etc, this is a permitted outlet for their largess.

Why would such clubs want to invest heavily in youth? Firstly, of course because it is a cheaper way of building their squad. It is far less expensive to develop players in-house than dip into the always over-heated transfer market. Secondly, it has been shown to be something of a winning strategy at clubs as diverse as Crewe, Barcelona and United. Finally (and crucially), because a successful youth set-up can itself be a good engine for income under FFP. And this could have unintended consequences for all clubs.

Financial Fair Play – "profit on disposal of player registrations"
Whilst youth development spending is specifically excluded from "Relevant expenses", profits from selling players are specifically included. The notion of "profits" from selling players often rings hollow with supporters are they represent the transfer fee received compared to the "book value" of the player, not what was originally paid. For players who came through youth systems, with no (or very low) transfer fees being paid, the "profit" on selling the player = the transfer fee received. Developing players and selling them on generates "pure" profit under FFP which can be included in the breakeven calculation.

Youth spending excluded and transfer fees included = a big incentive to spend
Taking these two treatments of expenses and income together, it is clear that there is a huge incentive under FFP to spend on youth development with an eye to selling on most of the players who come through the ranks. None of the spending on this is included in the UEFA calculations, but any transfer fees received are. And these transfer fees could be quite material. Here are some of youth players who United have sold in recent years and the estimated transfer fees:

United made a profit of c. £5.4m per year in the last four years from selling on players who came through their youth programme. That's a serious amount of money, from a part of the club that "costs" zero under the FFP rules.

Loosening of Premier League rules and FFP could lead to a feeding frenzy
As clubs look to comply with FFP, spending to create a United-like "factory" that produces young players will become more and more popular (indeed we can see City doing it already). Add in the mooted changes to the Premier League rules (especially the "90 minute" rule) and such a strategy becomes even more attractive.

The consequences of this for smaller clubs, who have traditionally looked at youth development as a key part of their model (selling on the most bankable to Premier League clubs and keeping others to avoid transfer fees) could be very bad. Bigger clubs, especially those with benefactor owners, will step up their search for the brightest and best nationwide and internationally. It doesn't matter if such players are needed by the big clubs, they can just be sold at 100% FFP "profit" to teams lower down the pyramid. Ironically, FFP and the new PL rules could mean that smaller teams end up buying back players from Premier League clubs who they would otherwise have developed themselves.

UEFA and the Premier League need to keep a careful eye on this area as the rules are developed and implemented. The obvious solution to prevent big clubs building "youth factories" largely with the aim of selling players on would be limits on youth squads and/or retaining rules on players joining their local clubs. It's certainly an area to watch.