The announcement this week about European Commission investigations into state aid cases in football represents an interesting development. I’m not enough of a Brussels insider to really understand it all, but it’s beginning to appear as if the Commission and UEFA are working in tandem. Last summer the head of the Competition Commission, Jose Almunia, issued a joint statement with UEFA supporting Financial Fair Play, and one of the reasons given was that compliance with FFP would lessen the probability that illegal state aid would be paid to clubs.
Now the Commission is looking at Dutch football, and re-opening the case of Real Madrid’s sale of its training ground to the city government, something which it investigated in 2004 and dropped.
This issue is complex, so first it might be helpful to repeat the Commission’s definition of an (illegal) state aid. It has four characteristics:
1. It involves the transfer of state resources
2. It confers a selective advantage that could not be obtained in the market
3. There is potential for the distortion of competition
4. There is an effect on inter-state trade
Now, government involvement in sport is widespread in Europe. For example, according to the recent UEFA club licensing report, 53% of stadiums and 50% of training facilities of the 235 largest European clubs are government owned (municipal, regional or federal). Five of the clubs are state owned. Governments also subsidise sports in lots of different ways, e.g. subsidies from lotteries for national federations or paying for construction of new facilities to host competitions like the World Cup or Euros. In many cases these subsidies are hard to trace through, and the ultimate beneficiaries not always clear (although if you consider the deal with West Ham to occupy London’s Olympic stadium, the benefits are often pretty clear).
So how is the Commission to untangle all of this and separate legal assistance from illegal state aid? I think the real problem is the criterion of “selective advantage”. Since sporting competition is always about winners and losers, unless there is a uniform subsidy across Europe, then pretty much any government involvement involves a selective advantage. And as for the market test- well, if there was proper market in Europe then we would not see the structure of competition we observe, as I have long argued.
In reality, I think this is a political game (duh, we economists can be pretty sharp sometimes), the object of which seems to be make examples of some high profile cases, and Real Madrid seems like a good target. They seem to be the Yankees of Europe- hated as much as they are loved. Spanish football in general seems under threat- with widespread insolvency and questions about whether social obligations can be paid, many clubs seem to risk the double whammy of failing to meet the Financial Fair Play requirements while benefiting from illegal state aid.
What is the endgame for all this? Spanish football has often been deemed the odd man out in Europe because there is no collective broadcasting deal, and is often criticised for this by other associations. While Spanish clubs and the national team have dominated world football for much of the last decade, it’s hard to see them avoiding a restructuring that will put their continued success jeopardy.
Pressure for the big two to compete on a more equal basis with the smaller clubs will grow. So what will Barca and Real do? Along with Manchester United they are the only truly global clubs at the moment. They are just too big for their own league, and I doubt they have much interest in downsizing to the level of the other Spanish clubs. So the only logical conclusion is that they seek competitors outside Spain of a more comparable size. This could be in the form of more international friendlies, or small scale competitions. But it also seems inevitable that they will try again to broach the concept of a European Superleague.
In the end, the real problem with FFP and the Commission’s state aid investigations is that market competition in Europe is heavily distorted, not by subsidies and state aids, but by a commitment to equality among 300 or so European clubs who are patently not equal. Anyone who thinks Real’s dominance is a product purely of a property deal which maybe gave them a €20 million advantage at best clearly isn’t thinking about the numbers. With or without state aid they are a global power, one of the world’s pre-eminent football clubs. A system which treats them as if they are genuinely in competition with, say, Nordsjaelland or CFR Cluj (no disrespect) will never be stable.
Interesting that you comment on West Ham and the Olympic Stadium.
Given that the £15 million contribution West Ham are making to the £150 – £200 million conversion costs is less than the club will make from the sale of Upton Park and the rent is only £2 million per year, it could be argued that the deal fails to comply with both points 2 & 3 in the list.
Yes, I’ve been looking for some estimates of the market value of the Boleyn Ground- it’s surely more than £15 million!
This is interesting also related to Valencia where about 70% of the shares are owned by a social foundation (The Valencia CF Foundation is a nonprofit organization whose mission is to develop sporting projects, social and cultural rights for the common good.) The shares were bought through a loan from Spanish bank Bancaja (now owned by Bankia) which was guaranteed by the Valencian Finance Institute, a part of the regional government.
Now obviously a nonprofit like the foundation does not generate the income to pay interest to Bankia who therefore have recurred to the regional government who guaranteed for the loan. This has lead to the regional authorities placing “their man” as president of the foundation stating in his inaugurational speech an intention to be actively involved not only in the foundation but also in the running of the club itself.
My question/thought/concern is that this would be in breach of UEFA/FIFA regulations related to government intereference…Surely an interesting case to look into – a strong example of Spanish governmental involvement in football clubs..
I think FIFA’s position on government interference has never amounted to contesting government support , and I don’t think they’d worry about a government appointed director – after all they never had a real problem with state run football in the Soviet bloc. I think the issue is more one of perception- if they think the government is opposed to the way that members of “FIFA family” want to go then there’s a problem. Again, politics rather than principles 🙂
Interesting discussions on this topic on specialist LinkedIn groups.
The state aid test isn’t quite as described. For example, the OS looks legal as open tender process means the market has decided the rent value for a stadium built in East London for a specific purpose.
One wonders whether businesses will now work out that they can complain under the state aid regime when rivals get grants. Or will it just be used by football fans to help their own teams?
I think the problem lies in defining “a distortion of competition” – this seems capable of multiple interpretations. I think your point is a very good one- I’ve always been puzzled by state aid law -given that European governments seem to intervene in almost every market I’m surprised there aren’t more cases. But that’s why I suspect it may have more to do with politics than economics.
Stefan
I think you should write a follow on article exploring the potential impact that state aid investigations could have on professional football in the UK.
There are a number of clubs who are at risk of having to pay back subsidies (with a high rate of interest). For example I’ve read both Cardiff City FC and Hull City FC pay peppercorn rents to their local councils to use their stadiums. One assumes a finding of illegal state aid would also lead to a 10 point penalty meaning they would not be promoted to the Premiership.
The same appears to apply to Swansea City FC. If they had a points deduction would they still be in the Premier League?
In terms of your questions, the impact on inter-state trade is found in all but the most local awards of aid. This is because the test considers whether other businesses would be less likely to enter the market because of the measure.
I think state aids is more about economics and law than politics. Most awards of aid are provided under the cover of agreed exemptions. There are some straight forward guides to the subject published on the web.
There’s plenty of interest in state aids at this time and it’s likely to have a dramatic impact on football.
Stefan, the test is the “potential to distort competition” so no quantification needed. One obscure case suggested a verbal statement of support from a government minister would be sufficient.
There’s a correlation between the successful football clubs and council owned stadia.
For example, Hull City have just been promoted to the Premiership. Doncaster Rovers have just been promoted to the Championship.
The 12th man is the taxpayer, regardless of whether they are a fan.
So PSV Eindhoven will have to repay €48m for the council buying then a training ground.
However the senior DG Comp staff, of whom a high proportion are Spanish are procrastinating about starting action against Real Madrid, Valencia, Barcalona etc? Why?
Financial Fair Play cannot survive as a concept in professional football unless the European Commission agrees to act in a non-discriminatory and transparent manner when making decisions about State Aid law enforcement.
At the moment it appears to be a device to stop football teams from the smaller Member States challenging the older, larger clubs like Real Madrid. This is surely the very opposite of what Financial Fair Play was seeking to achieve.
It’s not just football. It’s all professional sport. Indeed, if the European Commission want to look into this issue, a good starting point would be the potential state aid provided to the Llanelli Scarlets at Parc Y Scarlets.
This issue was raised by councillor Caiach in January 2013. The facts of this land deal seem quite hard to establish as many of the documents have not yet been made available to the public, but on the face of it there’s enough information to warrant the European Commission undertaking a closer inspection. I imagine if an investigation was announced that fans of the Scarlets would be quick to point out similar state aids to other clubs in Rugby Union to the European Commission.
Does anyone have a list of all the state owned training grounds? I bet there are plenty in Italy.
Swansea appear to be the first Premiership football club to be investigated for breaching state aid rules. Ospreys Rugby also seem to be under scrutiny.
http://www.thesun.co.uk/sol/homepage/sport/football/4961833/Dan-King-Sport-Uncovered-Swansea-baffled-by-European-Commisson-claims.html
The good thing about the state aid rules is they stop taxpayers money being wasted. Why should a taxpayer in Swansea have to pay at the turnstile, when they’ve already had to pay tax to subsidise the multimillionaires involved in the club?
It is a form of cheating. Pressurising a councillor to subsidise a business venture. It’s not a total surprise that both Swansea and the Ospreys have done very well in the years since they got subsided rent at the Liberty.
I think we’ll hear something on Real Madrid around 17 July.