Paying the penalty

Decades of overspending in the Premier League, but should accountants have a soft spot?
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As Kevin-Prince Boateng sprinted away to celebrate his penalty in the FA Cup semi-final win against Spurs, the jubilant scenes amid the blue half of the Wembley crowd could not be more distant from the chaotic ones off the pitch.

This season has largely been wretched for Portsmouth supporters, with the south coast side rooted firmly to the bottom of the Premier League, docked nine points for going into administration and the only rays of light arising from their incredible FA Cup run and the dignified way in which manager Avram Grant has conducted himself during trying times.

So how did it go so spectacularly wrong for Portsmouth? Essentially, the club was punching vastly above its weight in the transfer market, had an unsustainable wage bill and the banks decided they wanted their money back. Although Pompey wouldn't be the only club to be in this boat, far from it, its troubles are a murky area that seem to stem from making a series of blunders when it came to getting the right money men involved.

The debts of Manchester United and Liverpool are well documented but the difference between them and Portsmouth is marked: They can call on average attendances of 74,814 and 43,079 respectively this season, huge support bases across the world, large revenues from merchandising and European football, as well as the fact that they are global brands with huge commercial value. On the other hand, Portsmouth play in a decrepit, rickety old stadium with little scope for corporate hospitality, have a pulverised credit rating and the second lowest attendances in the top flight (17,840).

Enter a roll call of supposed benefactors who all fell by the wayside: Saudi Arabian businessman Ali al-Faraj, convicted fraudster Daniel Azougy, Sacha ¬Gaydamak, Sulaiman al-Fahim and then ultimately, Balram Chainrai. It was Chainrai, after becoming Portsmouth's fourth owner in a season, who served notice that the club would go into administration unless a white knight was found to stem the hemorrhaging of money from the club's coffers. No such gallant soul was forthcoming and consequently Portsmouth owe tens of millions. There is the not-unsubstantial �10m in outstanding transfer fees for players such as Glen Johnson and Sulley Muntari (both no longer at the club), while Her Majesty's Revenue & Customs (HMRC) is owed around �12m in unpaid PAYE. Many more millions are owed to creditors too.

Chainrai had a tough decision to make - fold the club or buy more time. He chose the latter option with the move into administration (see box for explanation). HMRC's winding-up petition put enough pressure on Portsmouth over the unpaid taxes to force Chainrai's hand. Now that a stay of execution has been granted, the next step is for Portsmouth to secure outside investment through the concerted efforts of its administrator, Andrew Andronikou - an uneviable task considering that a queue of creditors snakes out of Fratton Park and player wages alone are costing �3m a month, including tax.

Andronikou has to his credit tried to be as open as possible. "Portsmouth is an example of how not to conduct business in the world of football," he opined after looking into the books. He immediately acknowledged the "extensive media attention" surrounding the situation at the club and sought to reassure fans by asserting: "We are looking to immediately address the significant monthly cash burn of the club by implementing a strict cost rationalisation programme. This means every aspect of the club's overhead will be reviewed and scrutinised. Our aim is to maximise all revenue streams and to eradicate all unnecessary costs. It is imperative if this club is going to survive that it returns to the fundamentals of any other business in the United Kingdom and functions within its means by avoiding to trade at a loss." Andronikou is a partner at chartered accountants UHY Hacker Young. He specialises in bank receivership, investigation assignments and liquidation appointments, according to his company website profile.

So what has been learnt?

A cursory glance at the debt levels in the Premier League would say "very little", unfortunately. The last club to fail so dramatically was Leeds United back in the early 2000s when under the stewardship of Peter Risdale they massively over-budgeted due to the vain belief they would be regular challengers in the cash cow that is the Champions League. This turned out to not be the case and a fire-sale of assets meant that a very talented side were dismantled at the behest of creditors. Leeds now languish in the doldrums of League 1, although automatic promotion to the Championship is on the horizon for the South Yorkshire club.

Lessons do not seem to have been learnt from Leeds United's demise. Director of the Sports Business Group at Deloitte Paul Rawnsley has said: "Whilst debt in the Premier League has risen, two-thirds of this debt is in respect of just four clubs - Arsenal, Chelsea, Liverpool and Manchester United - and around �1.2bn is non-interest bearing "soft loans". On the positive side of the balance sheet, these four clubs also had �1bn of assets in respect of investment in stadia and other facilities and a further �450m from investment in players." The situation has led Rawnsley to predict: "Looking forward there will be an increased focus on clubs' business models and financial sustainability. Debt is not necessarily a bad thing for clubs; as long as it is manageable within a club's finances and is sustainable and repayable."

What now?

UEFA has made reform its key priority. In its report entitled The European Club Footballing Landscape, the European football governing body discovered that after analysing the accounts of all 732 UEFA-licensed clubs in Europe, astonishingly, Premier League clubs are more indebted than all of the other clubs in the top European divisions combined. In the ensuing soul-searching, UEFA came up with its break-even rule, whereby football clubs must break-even over a period of three years with a limited equity injection or face expulsion from European competition. These rules will be introduced from the 2012-13 season.

The knock-on effect of this is that rich businessmen wanting to buy clubs will be required to put up an equitable stake, rather than borrowing the money. Clubs will therefore have to run within their budget, preventing them from 'doing a Portsmouth' and spending money they simply do not have. However, UEFA's move has not been without its detractors. Premier League Chief Executive Richard Scudamore is a staunch supporter of clubs' right to rely on a wealthy backer in order to compete on the pitch. He has stated he would 'protect to the nth degree the ability of Mohamed Al-Fayed to do what he has done at Fulham'. Al-Fayed has ploughed a fortune into Fulham since buying the club in 1997, effectively carrying the club and its debts and making them an established Premier League force.

UEFA General Secretary Gianni Infantino has tried to temper any concerns there may be among the top sides relating to their ability to consolidate their positions at the summit of the game. 'Our intention is not to make all clubs equal with the same money to spend. What we see now is that the rich owners already go to the big clubs because they make more money. We want a healthier environment which will allow smaller clubs to invest in their infrastructure and be able to compete with the bigger clubs, knowing that they can only spend what they earn.'

It is clear that the tide has turned in terms of football debt and the crisis at Portsmouth may not have been in vain if it prevents another club from reaching the brink of capitulation. Hopefully, Pompey will learn from their mistakes, bring in the right owner and prove that this season's FA Cup final appearance will not become a footnote in a very sorry saga but the springboard to better days.

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