Football Governance - Culture, Media and Sport Committee Contents

Examination of Witnesses (Question Numbers 1-23)

Patrick Collins, Sean Hamil and Professor Stefan Szymanski

8 February 2011

Chair: This is the first hearing of the Select Committee's inquiry into football governance. I welcome our first three witnesses: Patrick Collins of the Mail on Sunday, Sean Hamil of the Birkbeck Sport Business Centre and Professor Szymanski from CASS Business School.

Q1 Ms Bagshawe: Could we start with a brief overview of things as you see them? How robust do you think the English model of football is?

Professor Szymanski: Partly I think the question is what do you mean by the English model of football? Are you talking about professional football? Are you talking about football in the top leagues--the Premier League, the Football League? Are you talking about the national team game? Are you talking about grassroots? Are you talking about local club football? Are you talking about, indeed, mass participation in football on an informal scale? Part of the problem is which bit we are talking about.

  If we talk about the professional game, my view is that the professional game is extremely robust and very successful. We have the most successful football league in the world in the Premier League. We have the most popular lower tiers of football anywhere in the world: the English Championship is by far the most popular second league in the world, the third tier and fourth tier are very strong. They have very high levels of attendance and of income. Although on the face of it people say, "It looks like they have lots of individual problems", taking the system as a whole, it is very robust.

  If you think about the national team, obviously people talk about issues with that, but that is a very special problem. If you think about the grassroots, in terms of participation, people participate very strongly in football in this country. There are lots of facilities and I would say overall I think it is fairly strong and robust.

Sean Hamil: It has a lot of strengths, but there are problems, and I think that is the reason why this Committee is conducting this investigation. The professional leagues are strong in the sense that they generate a lot of turnover, a lot of people want to watch it and English teams perform comparatively well in European competition, but if you focus on one key financial indicator, there have been 53 incidences of financial administration in English football since 1992. There has not been a single year since the foundation of the Premiership that the clubs collectively have made a pre-tax profit. Football is different but turnover is vanity, profit is sanity. I have got a copy of the Portsmouth administration document here. It is sorry reading, and one of the problems is that essentially what you have in administration is that, because of the football creditors rule, the key football creditors all get paid 100%, which means that the tax authorities get proportionately less and all the small creditors, such as St John Ambulance, do not get paid. Even looking at that as an isolated episode, that should be intolerable. I recommend that everybody read this document, because it is available on the Portsmouth website, and all the administrations follow the same pattern.

  It should not be acceptable in any industry that says it is a private business but has a loss-making financial model. Essentially, it receives a de facto subsidy from the public purse through the non-payment of taxes. To be fair to the football authorities, they have recognised this fact and we now have early warning for tax payments, but there has been a long history of non-payment of taxes at football clubs, and you have to ask why is it only now that it is being addressed? The reason, in my opinion, is because the tax authorities have finally said, "Well, we're going to get serious here".

  The other fundamental problem with a loss-making model is that it is about the quality of the owner that you get. If you have a scenario where someone of the quality of Delia Smith, a successful entrepreneur or Sir John Madejski, successful entrepreneur and local boy who tried to build a sort of major sporting institution in his hometown, decide it is not worth it and that they would like to get out, I think that that is a problem.

  Similarly, if you look at the Liverpool situation recently, in the nick of time, there was some very effective work by the interim chairman and his team to deal with failed owners who basically bought the club with borrowed money It's all very well to say that money invested by new owners is money being brought into the game but where you have a leveraged buyout, money is going out of the game. In our written submission from Birkbeck, we acknowledge all the many strengths of English football. It is very important to do that if you want to have a balanced discussion, but there has to be a realistic assessment of this particular issue. If you are losing money year after year after year, I'm sorry, that is a problem. Secondly, we have the recent example of the lack of financial regulation in the credit crisis. I make no bones about this: there is a role for effective regulation. That is the lesson of the financial crisis. The only question is what form it should take.

Patrick Collins: Essentially, I agree with very much of what Sean has just said. If it were sufficiently robust, we would not be having this Committee at all. I also think that the game tends to get judged on the success or failure or otherwise of the Premier League, which is a mistake. The Premier League has great weaknesses, which spring possibly from its foundation. I think it was conceived in the spirit of greed and over the years it has probably got a good deal greedier. This is one of the central problems of the game: judging everything by how much money it can make rather than what sort of contribution it can make.

  The solution is obviously far broader than this, but the notion of having two independent directors of the FA is an excellent one, because one of the central things that is going wrong with the game is the ongoing conflict between the Premier League and the FA. That has to be resolved. Once that has been resolved, we can look at the game much more calmly. I have some hopes of this Committee because it has been long, long overdue that Parliament has taken a proper look at it. I have urged for years that there should have been an inquiry of this sort and I am very pleased that you have decided to have one.

Q2 Ms Bagshawe: Thank you very much. That leads me neatly on to my follow-up question. If we think of the structure of English football as a pyramid, from the Premier League down to League One, League Two, Conference, semi-professional football, has overall the introduction of the Premier League, would you say, strengthened or weakened the English football pyramid as a whole? Mr Hamil, what do you think?

Sean Hamil: I think any high-level competitive league where people want to watch it is a good thing, so I don't think the Premier League is a bad thing. It would show a lack of focus on the part of the Committee if the way that it proceeded was that there is a problem with the Premier League. I don't think that is the problem. The issue, as you allude to, is the relationship between the Premier League and the rest of football.

  It is well recognised in all sports models that there is a pyramid, because the grassroots provide the players, even in an international marketplace, but they also provide the fans and the whole participation culture creates the interest. It is well recognised that there should be solidarity from the top to the bottom. The critical issue is how that solidarity relationship is organised. My own view, it won't surprise you to hear, is I think there should be greater solidarity between the Premier League and the grassroots, either through the Football Foundation, through payments down to non-league football or through partnership with the FA. But the Premier League itself is not the problem. The problem is that the relationship has got out of kilter, and you can see that, as Patrick alluded to, most obviously on the board of the FA where, instead of having a unitary board that tries to serve the interest of the wider game, you have two sectional interests who are not quite sure how to relate to each other.

Professor Szymanski: I agree with Sean about this not being just about the Premier League. One thing you need to take into account is the context of English football around the time the Premier League was formed. The history here is that in the post-war era, up until 1985, attendances were continuously in decline at English football. We all know the history of what the problems were in English football: neglect of investment, poor facilities, poor crowd control, hooliganism, a sense of danger and it not being a safe place to be.

  If you look in my written submission, I show a chart of the actual movement of attendance in English football; that reverses in 1985 and since 1985 it has gone continuously in the opposite direction. In terms of people going to football, we have just got back to where we were in 1960, and one of the things this Committee should think about is what brought about those changes. Why has English football become so much more popular? The Premier League is part of that in the sense that the Premier League was motivated by the advent of satellite broadcasting, which was again motivated by partly or largely by deregulation of broadcasting in Europe, which created competition to own broadcast rights, which created competition to be able to show things like English football. That competition bid up the value of the rights, which brought money into the game and that money has been used to buy players and make the game more attractive. That is that part of the story.

  Of course another part, as Sean would probably draw your attention to, is the improvement in football stadiums, which was motivated partly out of Government intervention following the Hillsborough tragedy and the Taylor report that followed on from that. But I would also point to another big change, which was an internal change that happened in English football in the early 1980s, which was that following the recession of 1980-81, the Football League authorities looked at football again and said that one of the problems in English football was that it was not commercial enough. You could not pay directors, you could not pay dividends and, essentially, the Football League's own investigation concluded that it needed to adopt a more commercial approach. That is what, I think, underlies all the changes that have gone on in the last 20 or 30 years. Football has become more commercial. Of course this has caused a lot of outrage because ticket prices have gone up, and there is new merchandising and new ways of selling football. Certainly people of my generation or older look back and say, "Oh well, things must have been better in the past."

  But in reality you have to look at the level of national and international popularity of the game and say, "Well, it has really been very, very successful." Sure, there are issues you can talk about and problems that you might focus on, but the overall background picture should be one of this is one of Britain's most successful export industries right now and, before you think about interventions that the Government might make or the state might introduce, you should ask yourself, "Could we jeopardise any of that success and popularity in the future?"

Q3 Ms Bagshawe: Mr Collins, have you anything to add, particularly in relation to how the Premier League affects the other strata of English football?

Patrick Collins: I think, and it is going way, way back to roughly the time Stefan was talking about, some people have a certain yearning for the kind of equality which prevailed before 1983, when each club took their home gates and paid the away team 20% of that gate. The result was a rough equality among the 92 clubs. In fact, going right back to 1965, the first television contract for the season was £5,000 when the 92 clubs received around £50 each. I would not recommend that, but after that in 1985 when it started to change—the first division took 50% of the revenue from television, the second division 25% and the third and fourth 25% each—it produced a game that I agree had many of the problems that Stefan spoke about but it was also an age in which clubs succeeded by virtue of their ability. Derby won a league title and Nottingham Forest won two European cups, not because they were richer than the rest but because they found a manager who was better than the rest. The game seemed to be then centred on sport rather than money.

  It is absolutely inconceivable that you could have a Derby or a Nottingham Forest, totally inconceivable. They couldn't approach the feats that they did. I find some regret in the way that the Premier League came and corralled the huge percentage of the money and made a much more unequal game. So you now have people coming into the game with huge spending power, you have a sheikh here, another guy up there, who can determine the course of the season by the power of their purchasing. Sport lost a great deal when it lost the kind of equality that used to prevail.

Q4 Mr Sanders: As we are going to be dealing with supporters trusts in this inquiry, I have to declare I am a member of the Torquay United Supporters Trust. That leads me nicely to my question: is there sufficient redistribution of income down the pyramid to sustain football's structure in the longer term?

Professor Szymanski: That is a very good question. I guess again it comes down to what one would mean by "sufficient" in this context. In a sense, you don't need any money to trickle down the pyramid in order for there to be people interested in playing football and people to want to play. For example, if you cut off all solidarity mechanisms now from the Premier League to the lower levels, the lower levels would all continue, people would still go to watch. If you went to a school and asked how many kids would like to play Premier League football, if you cut off all the solidarity mechanisms, that number of kids would not go down. Ultimately, football is a game played by people and the key incentive is, "Do you want to play this game?" and that is not going to change, regardless of the solidarity mechanisms.

  That does not mean to say there is no justification for money trickling down, and it is perfectly reasonable to say that money should come from the top levels in order to help provide facilities and provide investment and maybe improve the quality of the game. That is no doubt true, but again one of the things we should perhaps ask ourselves is: where do we want our footballers to come from? A lot of people are very concerned that there are not enough young footballers coming from this country and too many footballers coming from abroad. In other words, Premier League money is being used to track down talent globally rather than nationally. Is that a bad thing? Should we think that it is more important that we have more English footballers or more Welsh or Scottish footballers, rather than having more African footballers? We have not had any major stars in the Premier League from India, for example, but no doubt that will come at some point, and more Chinese players and so on. Is it bad that they spend their money on that?

  In a sense, when you talk about the trickle down and is there enough money being redistributed, ultimately all the money that gets spent in football goes on footballers in one way or another, and the teams at the top are looking to find the best players that they can. I do not see any particular reason to say that there is not enough money currently going down to the lower levels.

Sean Hamil: Your question brings us back to the problem of loss-making. On the current system, there is a famous academic paper by Peter Sloane that says what sports club owners do is they maximise utility not profit. They want sporting success, therefore they always overspend. Alan Sugar used the rather crude expression "the prune juice effect" about Tottenham: money goes in one end and out the other end to players.

  What happens in that scenario is that unless you are able to deal with this fundamental challenge about how you can stop clubs spending more than they earn on salaries, you will always have chronic financial instability. To go back to the trust example, I was an elected director of Supporters Direct. It is well known I am a passionate supporter and continue to be, but one of the problems we faced at Supporters Direct, post-ITV Digital, was that 17 clubs went into administration because of a collapsed TV deal. At one point I think there were seven league clubs in fan ownership, basically because there was an investor strike, because no one would buy a league club in that brief period of 18 months, so it was like a financial accident and emergency. The volunteers took over, they cleaned up the balance sheets through voluntary labour, fans' investment, and at the end of the period when the situation stabilised of course the fans said, "We can't compete because our rivals have got a sugar daddy.". So what happened? They were reluctantly forced to sell back to private owners. In other words, financial virtue did not have its own reward.

  That is why the principles of UEFA financial fair play are absolutely critical. The fact they happen to come from Europe is neither here nor there. They should be applied in every league in Europe independently because what happens is that if you are overspending on players you are not spending on disabled facilities for local fans, you are not spending money on that family facility, you are not spending money on that outreach into the community. Stefan, who is one of the most pre-eminent sports economists in Britain, throughout Europe, has written extensively about this whole business of somebody has to pay somewhere along the line.

Q5 Mr Sanders: Where do you regulate and who regulates?

Sean Hamil: It is absolutely clear who should regulate. The regulators should be the football authorities but the Government has a role in nudging them in the right direction. If you take the Taylor report, football could not reform itself at that point; Government had to intervene and say, "We're sorry, but you're going to have to modernise your stadia." I think we're at a similar turning point.

  From 1992, four factors came together to create a perfect storm for football. First of all, stadia were being modernised with a 25% subsidy over 1992 to 1997 from a levy on the pools betting duty. English teams had just re-entered European football in 1990. The pay TV revolution had just started, and we had just started 15 years of uninterrupted economic growth through to 2007 and, as we all know, as growth rises, a disproportionate amount is spent on leisure. That ended in 2007. We are in a paradigm shift now and it is important that the football authorities focus on that. Things have changed. European money is now a necessity not a bonus. The TV money domestically has plateaued. They have to pay for their own stadia money now and we are in a financial downturn. That is an appropriate time for reflection. But to come back to your fundamental point, something has to be done about loss making because loss making basically means spending everything you have on players and not building the club as a viable institution, which not only benefits its shareholders but also the wider community.

Q6 Mr Sanders: You mentioned the football authorities. A lot of people give that answer, "The football authorities should do something". Who are the football authorities?

Sean Hamil: The FA should be the lead body because the FA is the governing body of football, and on the board of the FA are representatives of the Football League and the Premier League. When people attack the FA, they are actually attacking the Premier League and the Football League as well. It is the governing body. If you read the submissions from the Premier League, they acknowledge the relationship and so on. There is no need to reinvent the wheel. What is necessary is to recalibrate the relationship between the two leagues and the FA and, in my opinion, to allow the FA to get on with its historic role of governing the game in the wider interest. The job of the leagues is to run two successful leagues. It is not to govern football.

Q7 Mr Sanders: Can I come back to my original question about the pyramid? The pyramid is not just about an agreement of income going down; in the past a lot of transfer money also went down the pyramid that now tends to go overseas. Would Patrick want to say something on that? There also used to be more redistribution within by sharing of gate receipts, which went out of the window, which clearly benefits the bigger club against the smaller club.

Patrick Collins: The transfer money point you make is very relevant. In the last transfer window, I believe I am right in saying that the leagues outside the Premier League benefited by about £12 million, which is obviously peanuts given that about £200 million was spent. So this doesn't happen. We hear about this trickle-down effect. One of the great dangers of the so-called trickle-down effect is that when a monstrous fee is paid, for instance like the one that has just been paid for Fernando Torres, it sets the bar at a different level. People who have other players to sell say, "Well, if he is worth that, mine must be worth that." It is not just the fee but of course the ancillaries that go with it, the salary even more so than the fee. I do not know what Chelsea are paying Torres but it would be enormous. The next agent will know what Torres is being paid and he will negotiate on that basis. The idea of this wonderful pot of money going down and doing good all over the place seems to me to be a misnomer.

  I take Stefan's point that the Premier League has fulfilled many of its aims and ambitions, but I remind you that one of the central reasons it was brought into being, one of the reasons under Graham Kelly, who I believe is speaking to you later, under the blueprint for football he devised, which effectively brought the Premier League into existence, was that the Premier League would make for a successful England team: because of the extra time players would have to prepare because of fewer games and so on, we would have a successful England side. As we all well know, every two years we have inquests and eruptions when first England fails at the World Cup and then it goes out at the European Championships. The Premier League does a good job of preparing the world's players to perform at major tournaments, but since there are fewer and fewer English players playing in the league it does less well with England players.

Q8 Jim Sheridan: Stefan, if I picked you up right, you said that the money generated in football tends to stay in football. Can I therefore ask you about the role of football agents, because from where I am sitting the agents take money out of the game. That money doesn't go back into the game; that money goes out of the game. There is a self-interest in agents moving players around clubs in order that they get their commissions fee and so on. Given the fact that there is only one source of income for football, and that is the paying fan who buys the merchandise, the televisions, the tickets, they're the only people that put the money into football, is there an argument to regulate agents so that they do not move players or encourage players to move around clubs and get these extortionate, ridiculous sums of money? That is money that is leaving football; it doesn't come back in again.

Professor Szymanski: Before answering that, can I just briefly go back to a point that you were raising. Your comment about the trickle-down effect is, I think, completely wrong. If you go back historically, there never has been a trickle-down effect. If you go back to the very first Government report, the Department of Education and Science's report in 1968 by Sir Norman Chester, it showed that, in fact, teams in the third and fourth divisions were paying net money to the top division. The trickle-down effect is a myth and that is part of the problem with the whole approach when people talk about it. They do not base the arguments on researched facts. I am sorry, that is not a particular criticism of you, but in general there is a reluctance to look at the data about what we know and more interest in talking about emotions.

  To come to your question now, from the day that agents came into the game, it was clear that the clubs and the football authorities hated them and would like to get rid of them. Why is that? It is because football agents drive up the wages of their clients, and of course they have been unbelievably successful in the last 20 or 30 years in doing that, so you will get a lot of calls for regulation of football agents because of the damage that they allegedly do. If you think about the situation we had before we had football agents, we had the retain and transfer system in football, which effectively tied players to the clubs for their lifetime. Up until 1960, we had a maximum wage rule that said that players could only be paid up to £20 a week maximum. Effectively, all the money that came into football was kept within the clubs, within the organisations that run the clubs, and the players got nothing.

  There are two points one could make about that. One could make an ethical case and say, "Is it fair that the people who create the performance on the pitch get a tiny fraction of what is paid?" We could argue about the ethics of that. Most of these people would play for nothing. Any of us would love the chance to play at the top level and so maybe they do not need to be paid that money. But the other question to ask is, when the money did stay with the clubs and the organisations that ran football, was it well used? Was it invested for the future? Was it invested in developing the game? Arguably, that coincides with the period of dramatic decline in English football. It is so easy now, 25 years on, to forget the scale of the crisis in English football that was continuing and persistent over a quarter of a century. The game really was on its knees. Allegedly, Margaret Thatcher talked about shutting down football in this country. It is unimaginable.

Q9 Jim Sheridan: Football has changed in 25 years. We have come a long way in 25 years. I am not suggesting for a minute that the clubs keep the money and do not pay the players appropriately, but the bottom line is it is the supporters that are paying £50 million for players. That is supporters' money.

Professor Szymanski: Absolutely, but the supporters willingly part with the money because they go to watch the football and they watch the football. Nobody is forced to go to watch football. Again, if you are talking about any high-quality product, people pay a high price to get that high-quality product. We would not be having a committee here about any other high-quality service that is being provided. We wouldn't be talking about Gucci shoes or luxury cars and saying, "People are paying large sums of money for this. Why is that money not being used for the right purposes?" The point about this is that the agents negotiate on behalf of their players to get them a reward for their services. This is true not just here in English football, it is true worldwide. If you look at the United States, for example, very much the same situation prevailed up until the 1960s: the players got nothing and the teams took all the money. Then players got freedom of contract, agents came into the game, and the players' wages went up dramatically. The clubs told everybody and you can look at congressional hearings where the clubs and the franchises all say, "Oh, you're destroying our game and it's ruining the game" but the fact is that there, again, attendance has grown, people have become more interested and the coverage has increased.

  Regardless of the ethical question, in terms of does it damage the health of the game, I think not. Partly the reason is that the agents have the incentive to go and find new players. What they have done is the quality of football has gone up, I would argue, because there has been this persistent search globally to find the best possible players.

Patrick Collins: I butt in because you do not often hear defences of agents. I think they are a scar and a stain on the game. The money the agents have taken out--we cannot be sure because all the figures are not available. Everyone has terrible stories about football agents because so many regard them, not as Stefan seems to, but as leeches and parasites. There was one 12-month spell around 2009 when Premier League clubs paid them a total of £70.7 million. That is money the game will never see again, and for what? It is money that is just lost to the game and I think that is quite scandalous.

  A couple of examples. When Wayne Bridge moved from Chelsea to Manchester City, the agent, Pini Zahavi, was paid £900,000. Now, Bridge wanted to go to Manchester City, Chelsea wanted to sell him and City wanted to buy him. Both clubs had chief executives who could have picked up a telephone and done the deal in about five minutes, I would guess, yet Zahavi took £900,000 from this deal and nobody thought that was appalling. Years ago, in 2004, Manchester United paid an agent named Rodger Linse £1.3 million for renegotiating the contract of Ruud van Nistelrooy--not negotiating a contract but renegotiating it, and he got £1.3 million for it. Yet there is something called the Association of Football Agents whose chairman is somebody called Mel Stein, and he wants them to have a seat on the FA Council, because he says, and I quote, "Agents perform a valuable role and should be acknowledged as stakeholders in the game." Those arguments, at the moment, go unchallenged by the football authorities. We need people there who will take on this nonsense and we do not have them at the moment.

Sean Hamil: May I just make a very brief observation? The thing about agents is that it is legitimate. I have done a bit of active trade unionism myself. It is legitimate that you have a representative, but the problem with agents is that there has been so many abusers taking money from both sides and so on, but there is also potential for corruption. At the heart of the Calciopoli scandal in Italy in 2006, agents had players who they effectively controlled on both sides in a game. The role of agents in sport is much more complex than it is say, for example, in movies, and for a whole lot of different reasons it needs to be very aggressively regulated.

Q10 David Cairns: It struck me in reflecting on what has just been said that there is a connection, which is that when all this money goes on wage inflation and to agents, it is the people who make Gucci handbags and Lamborghinis who benefit from this. Maybe we should get them in as part of it.

We are going to talk about debt financing and leveraged buyouts later, but just a couple of specific questions before we do. Picking up Adrian's point about redistribution, although this is an inquiry primarily focusing on England, there are clearly implications for Scotland and Wales and all the rest of it in terms of fit and proper persons, leveraged buyouts and foreign ownership, so we will bear that in mind. One of the things that rankles in Scotland is that the clubs that get relegated from the premiership get 30 times more money than the team that wins the SPL. Isn't this parachute payment—it is a form of redistribution and I understand the logic of it—just a big fat reward for failure? You come last, so you get extra money for it. It is a Fred Goodwin model of rewarding people. Worse than that, doesn't it import into the championship wage inflation that would otherwise not be there, because of this grotesque distortion?

Professor Szymanski: The point you make about rewarding failure is a very important one, because the Committee will think a little about the American model and why something like the NFL--we just had the Superbowl--is so incredibly successful. One of the points people make about that is that it is a system that rewards failure as well. The traditional football model we have in Britain, Europe and most of the world is a model that punishes failure through relegation, and that is one of the things that drives the clubs to live financially on the edge. They live financially on the edge in order to avoid relegation and to get promoted up the system, so we have a hyper-competitive system. This is true not just of this country; it is true everywhere in football. It has always been true, because of the nature of the incentive system.

The NFL is the most profitable football sports league in the world by a country mile. The 32 owners are incredibly wealthy and they get incredibly wealthy out of American football, and they do this by being, as they describe themselves, 32 socialists who vote Republican, because what they do is they share everything in common: 40% of the gate money goes to the visiting team. They share all the broadcasting money absolutely equally, they share all the merchandising income equally. Imagine Manchester United sharing its shirt income with Stoke. That is what goes on in the NFL: every team shares equally. They also have a salary cap, which limits the amount that they can pay players, and they have a draft system, which rewards the worst performing team with the first pick in the draft, which in addition gives them exclusive negotiating rights, which helps to keep the wages down. They have designed a system that keeps wages down.

Q11 David Cairns: What is the salary cap?

Professor Szymanski: I cannot remember the latest. It has changed. They are just about to have a big strike probably because the collective bargaining agreement—they have a union and an unionised—

David Cairns: It is socialism then.

Professor Szymanski: It is socialism. Again, in America all the players are represented by strong unions. The old agreement I think was 58% of revenues. I think it was 58% but I would have to check the figure.

  But they have these arrangements, which mean that things are held in common. One interpretation of the parachute payments, to come to your question, is that in fact the Premier League is setting about doing the same thing. One implication of the parachute payments is that teams that benefit from these payments are very likely to get promoted again. They have just extended the parachute payments, so in other words they are reducing the size of the club that can participate in the Premier League.

  One way of thinking about what they would ultimately like to do to run it, to be successful and to avoid all the financial problems that they have, is to become a closed league like the NFL, get rid of promotion and relegation entirely. In many ways, when you think about the mechanisms that you might think about to bring financial security to the Premier League, you might be helping to move it towards an NFL style organisation in the future. I think that is something you should bear in mind in your discussions.

Patrick Collins: I would agree with Stefan's analysis, though perhaps I would not share his sympathies. One of the principal reasons for sport is winning and losing. You win, you succeed; you lose, you suffer the consequences. But I do agree that the Premier League, deep down, wants to be a closed shop. Phil Gartside, the chairman of Bolton, has tried once or twice to bring in this idea of no relegation, keep the whole thing, so you won't have to worry about losing vast sums when you go down. It was a rather subtle way of doing it. In order to bring this about, the parachute payments, which I think are a really important subject with regard to this inquiry, have now grown to enormous size. They are £18 million for the first two years and more over the next two. This seems a lot anyway, but when you realise that, from television alone, every old-time second division club gets £1 million whereas every Premier League club gets £45 million, the gap is horrendous. The parachute payments involve going down with £18 million in your pocket when everyone else has got £1 million and so the likelihood is, as Stefan says, they will come straight back.

  The idea of at least a two-division Premier League is still lurking there. In that sense, again it is what I was saying earlier, the whole thing has become who can wave the biggest cheque, and I don't think sport should be like that. It should be more than a battle between billionaires, and the public rightly expects more of it than that, but that is the way it is going at the moment.

Sean Hamil: Stefan is correct when he says that an obvious solution to the loss-making is to have a closed league and the increase in the parachute payment looks very like a de facto attempt at that. But you can deal with that within the European system of promotion and relegation, and the way you deal with it is to say through some version of financial fair play it is written into your membership of the league that if you get relegated you have to renegotiate your salaries. I am not a fan of the football creditors rule, I don't think it is sustainable in the current environment, but the leagues have enormous power because they control ownership. If you want to play in the league, you have to get the league's permission, and if the league is really serious, it can say when you get relegated, particularly if you have the financial principle that you cannot spend more than you earn, then written into every player contract is renegotiation of salaries. It can be done. There has to be radical thinking about this. The key thing about sport is that it is a joint product. The reason why the Republicans vote socialist is because they recognise the peculiar characteristics of sport. Even the children in the schoolyard know "I pick one, you pick one" if you want to have a competitive product. Only in sport do you want a strong competitor, and it is not for any political, ideological reasons that you need to regulate. You need to regulate because of the peculiar nature of sports competitions, and this particular conundrum is just one more example.

  You just need to be a little bit imaginative. We can still have all the good things of promotion and relegation. Hopefully AFC Wimbledon are going to embody that by getting back in the Premier League soon from starting again in 2002. The problem with a closed league is you get rid of that romance and that magic, which is at the heart of the economic power of English football.

  I just want to add one thing. Salomon Brothers in 1997 brought out a report on how you value a football club. It was a very insightful piece of work by a group of hard-headed analysts. They said fans' emotional attachment to their clubs--fan equity--you can put an economic value on it, because they won't substitute. You know if you get relegated and you're Leeds United you will still have 28,000 supporters and you can borrow against that. They did borrow against that and it was a disaster, but that is not the point. The point is that you can put economic values on these factors. They understood the peculiar nature of fans' relationships, and because they were clever and imaginative, they were able to define it in financial terms. That is the challenge here. Let us try to understand the peculiar nature of this industry and to come up with regulatory measures, like the renegotiation of players' salaries when you get relegated, which are a moderate response to that problem, unlike the radical response that would be a closed league.

Q12 David Cairns: As a Merton councillor at the time that the local community was stabbed in the back by Wimbledon FC, I entirely agree with you about AFC Wimbledon.

May I change the subject and ask a question about supporters who are, after all, at the heart of all this? At the risk of coming over all jumpers for goalposts, I remember as a boy hanging around outside Cappielow asking random strangers for a punt over the turnstiles. Obviously that does not happen any more and I do not encourage children to ask random adults for that, but is there any cause for concern that according to the Daily Mirror, an outstanding organ, the average age of a Premier League football fan is 43? Speaking as a 44-year-old, that is still young, but it cannot be good that the average age of a football fan is 43. The corollary of that as well is, maybe not outside London but certainly inside London, it is becoming increasingly a middle-aged middle-class pastime, and our future players are not coming from the ranks of the middle-aged middle-classes. It may be sustainable at the minute but long term is there not a problem if you get an ageing middle-class fan base?

Sean Hamil: Yes, there would be.

Professor Szymanski: I think you will get the pattern here. No, it is not a problem: think of the Premier League as a luxury car. Who has luxury cars? Typically, middle-aged wealthy men, no kids. Are Porsche saying, "Crikey, the average age of our owners is 43. Have we got a long-term problem that people won't buy our cars?" Of course they are not, because people know that that is something you only get to have if you have a high enough income. If you cannot afford a Porsche--I cannot afford a Porsche--you go down the ranks. We have tiers of football as well that people can go to. It is noticeable that, while the Premier League's attendance has grown by only 70% in the last 25 years, against a background when prices have increased more than seven or eightfold in real terms. What has happened in the Championship is attendance there has risen by 180%. That is partly because prices have not risen by so much. Back in 1985, you could go to a Premier League game or a top division game for £2.80, that was the average price of a ticket, which in today's money is about £6.60. Imagine if that was still the price today. The stadiums would have lines outside of them going for miles round the corner because you just could not fit all the people who would want to go and watch. It is so popular. Of course that overflow has gone down into the lower leagues and it reflects the overall popularity of the game. You might say, "Is it terrible that it has become gentrified?"

Q13 Mr Sanders: It is interesting that overflow has gone into the lower league. The fact is the lower league attendances are lower today than they were before the Premier League, if you go back 30 or 40 years.

Professor Szymanski: No, no. That is completely wrong.

Mr Sanders: My club's attendances are significantly less than 40 years ago.

Chair: Adrian, we are going to have to move on, we are very short of time.

Q14 David Cairns: I understand that as a model. I do not accept it; I understand it. If I can't afford a Lamborghini, I buy a Ford Sierra, fine. If I'm a young kind growing up in Tottenham and I can't afford to get into White Hart Lane, I am not going to go to Torquay to get into it, so I think, the analogy is faulty. But the question isn't about whether or not it works as a business model today but whether there are any implications for the long-term health of the game if young working-class kids are not getting access into the grounds to see these things and inspire them? Maybe this is tied up to our inability as Scotland and England to produce decent players that can win tournaments.

Patrick Collins: I think it absolutely is. I think too that Premier League clubs recognise this increasing problem. At the moment, the Premier League charges the most for tickets in all of Europe; it is the dearest ticket in Europe. The average price is difficult but in London it is perhaps between £40 and £50. There are family deals and concessions until the age of 16 and then comes the gap. It used to be one of the rites of passage that you went to football on your own, usually when you were younger than 16, but certainly from 16 you went on your own. Now they cannot afford it because they have to pay full price and they cannot do it. So between the age of, say, 16 and 30 they are priced out of the game. They still watch football, they go down to the pub and watch it on television. They watch the Sky broadcasts in the pub. Those are the people who are most likely to be lost to the game because you then take the risk that after all these years of watching football relatively cheaply down the pub, they are going to go off and buy a season ticket at Highbury or somewhere and it probably won't happen. It is a real cause for concern that one.

Q15 Alan Keen: I want to give you the chance to talk about debt, but first can I ask you a very basic question. Who are we doing this inquiry for? When I say "we", I mean everybody. All the people here have a great interest in football. I was brought up in a non-political family. The first time I was offended by something, which I didn't know was political until years later, was when I went to buy tickets at the old Ayresome Park, Middlesbrough's ground, came back and asked my mother why it said Middlesbrough Football and Athletic Company Limited on the doors. I was shocked to find that there were shareholders. I thought I owned it in the same way as I owned the recreation ground equally. I mention it because of the current debate. The other thing that offended me around about the same time was finding that Imperial Chemical Industries, that saved Teesside economically, owned the Cleveland hills at the beginning of the Yorkshire moors and that offended me, and it is particularly pertinent with the forestry debate that is going on.

Are we doing this because we care about the football supporters? If they are offended, of course it will affect the money people afterwards, and you have just been touching on that. Why are we doing the inquiry? What do you think we should be recommending at the end?

Sean Hamil: You are doing it because football is not just a business but it is a very significant national cultural institution. I absolutely acknowledge the tremendous success of the Premier League and the Football League, and Stefan is right about this. Crowds are up significantly and that is down to good management, good marketing and improved stadiums, and a lot of private investment as well as public investment, but it is obvious that there are problems. I make no bones about it: I do not think that you can leave everything to the market because you end up with negative equity and a lot of other nasty, unpleasant things. There is a role for Government intervention. Always remember that the Taylor report was the catalyst for the reform of English football. There is disquiet at the moment about what is happening on a number of fronts. People are not rejecting the genuine successes. I think it is legitimate that the elected representatives of the people should take an interest in a subject that is close to people's hearts.

Professor Szymanski: I have a very specific answer, which again is in my written evidence, but I think you should be guided by the Treasury Green Book when you think about this, which recommends the basis on which there is action justifying public intervention. It has to be either some kind of market failure, and specific types of market failure are listed in the Green Book, or some need to redistribute income because for some social basis it is not justified. My paper explains that there is not a market failure that I can see very obviously, and it does not fit the normal characteristics. If you argue there is an income redistribution element, I come back to my luxury cars point. There is an income redistribution point in the same way that poor people do not have access to luxury cars.

Patrick Collins: I think you are doing it because it matters. These things matter because football is the game that the nation plays and it is the game that the nation loves. As we have already said, it holds a place in the history and in the affection of the country. You can see it when the World Cup comes around and for some people football is an expression of the nationhood in a sense, and the disappointment is always crushing when it happens. The game has lots of things going for it: a large passionate fan base, wonderful stadia, wonderful players. People know that and it is frustrating because we know we can do better. I heard the Minister for Sport talking about football being the worst run sport in the country, and it might well be. I do not know how he measures that. That is not good enough. If overnight the television money dried up--the Murdoch money dried up and Sky walked away--and all we had done in that time was create a lot of wealthy young men and rich agents and a few very wealthy directors, it would not only be a sporting tragedy but something of a national tragedy.

Q16 Alan Keen: On the debt, because we are short of time, I will restrict it to one question. The fair play rules meaning that clubs will not be able to compete in UEFA competitions from 2013, what effect will that have? Will that solve the debt problem? In a way it has got to, the clubs have got to solve that problem. But we would love to hear what you have to say about it.

Sean Hamil: We will not know until it is implemented, but my view is that, for all the reasons I have outlined, I just do not believe that you can run an industry long term loss-making without problems. I think that UEFA, for its own reasons, has realised that. The European Club Association, which represents the major clubs in Europe, supports them 100%. The proof of the pudding is will it be able to force it through. If it is able to do it, if it is able to establish the basic principle that you should not be able to spend more than you earn and that money on youth development, stadia development is exempted, then everybody will benefit because what will happen is the Delia Smiths and the Sir John Madejskis of the world will say, "I don't have to sell" and you will get a step change in the quality of the owner, and things will improve.

  The problem at the moment is that there are too many people with an unhealthy appetite for financial risk. I am sorry to keep emphasising this point, but sooner or later that ends in tears. The Portsmouth example, they said there would never be an administration in the Premier League. Well, there it is, read it. It is a sad read. What went on at Manchester City with Thaksin Shinawatra was absolute skin of the teeth escape from a financial disaster. The same thing up at Liverpool. Now, how long do you have to continue to be lucky? The central point is English clubs will not be disadvantaged because everybody in Europe, if it is implemented correctly, will be subject to the same rules. What is necessary is for the English football authorities to now engage in active partnership with UEFA. I am not saying they are not active partners at the moment but just that maybe they could be more active partners, because what English football has to say is important for the future of European football.

Patrick Collins: I very much agree with that. It is risking everything to speak about debt with two economists here, but we are constantly told that debt is no bad thing, that everybody has debt, that sustainability is the thing. Then we see Manchester United, a club that never owed a penny, suddenly saddled with £750 million worth of debt and Liverpool, run by the much loved Hicks and Gillett, amassing debts of £351 million. Those are extraordinary figures and the public thinks that is wrong, and I think the public are right to think that.

  But there was one thing I noticed. One of your next witnesses, Lord Triesman, in 2008 said, and I quote, "I don't think anybody who is rational can look around this environment we are in and think they are immune. Football is obviously carrying a pretty large volume of debt. People will be making business judgements about whether it is sustainable or not but it is carrying quite a large volume of debt. We now have a position where it is very hard to track things. It's not transparent enough and we don't know, if we are able to track it, if the debt is held by people who are financially secure or not." Triesman was roundly condemned for that but I think he had it absolutely right and I think he is still right.

Q17 Paul Farrelly: The St John Ambulance situation was mentioned earlier by Sean. If I am running a business that is going bust and I do a special deal with some creditors, that is illegal because it is called preferential treatment. If I am a new owner of any usual business, I do not pay off the previous creditors unless it is worth my while, yet in football I am forced to do so, setting up a post facto preferential treatment of particular creditors. Is that wrong and should it be made illegal?

Sean Hamil: There is an argument in sport, because of its peculiar economics, for special arrangements. You could have made an argument for the football creditors rule in the past by saying that there is a need to protect clubs who manage their businesses reasonably effectively from the odd exceptional reckless behaviour. But the trouble is the recklessness now is absolutely endemic and therefore a direct answer to your question: I personally do not believe the football creditors rule is sustainable. I think the football authorities, all three of them, have sort of recognised that in their more assertive approach to demanding that their clubs demonstrate they are paying their tax debt they are sort of halfway there. It is in their own interests to drop it now. Who knows what is going to happen with the court case. The point about the football creditors rule is that it is totemic, because what they are basically saying is, "If you're in the club we are going to look after you. If you're outside the club…" I don't think it's sustainable.

Professor Szymanski: For once, I completely agree. I think it is a crazy rule and it should be eliminated. Once you start to treat football as a special case, once you start to say, "Oh well, it has got this special significance in our society", that is when you go down this route of having crazy rules that do not work. The same thing is going to happen with financial fair play. It is 80 pages long at the moment. In five years, it will be 800 pages long. The lawyers are going to crawl over it and money, a lot more money, won't be going to agents, it will be going to lawyers, but once you start to regulate these things, it mushrooms and you get into inconsistencies and regrettable situations.

Patrick Collins: I agree totally with my colleagues here. It is very difficult to make the case for being a force for good in society when you attempt to enforce such an antisocial rule. The idea that football must look after itself first and that everything else comes in a distant second is offensive.

Q18 Paul Farrelly: There is a bigger question on the financial fair play rules, which have been welcomed, as to whether they will bite, because they seem to me to be terribly open-ended and subjective at the end of the day. That is something for the future to resolve. But currently, for good or ill, across all sectors of business, leveraged buyouts happen. As long as they are conducted legally, it is very hard to stop them, but they certainly make business more risky. Is it time for the football authorities to act and put in greater disincentives? In particular, is the nine points deduction rule sufficiently strict or should clubs that go bust be made to start right at the bottom again?

Professor Szymanski: I do not think that leverage has a huge amount to do with the reason that clubs go bust. The fundamental reason is ambition, the ambition to be successful or the desire to avoid relegation. It is inherent within the system that clubs will take every risk available to them. It is perfectly reasonable to say the football authorities can invoke rules and regulations, and probably quite sensible if they do, to try and limit some of those financial risks, and maybe this Committee can encourage them to develop those rules. But right now, of all the 53 administrations that Sean referred to, where are the victims? Okay, the teams get relegated and the fans are disappointed. Are the fans disappointed that the club lost money and went into financial administration or are they just upset that the club got relegated? I think it is the latter. I do not think anybody, apart from the owners, cares about the money. What is important is the level at which the team plays. But the point about that is nobody wants to abolish promotion and relegation. We want teams to fail. In other words, you could get rid of all the financial problems of debt and so forth, and the fans are not going to be any happier on average because they will still be losing out when their team gets relegated.

Sean Hamil: In 1999, in answer to the minority report of the Football Task Force, the football authorities said, "We don't need any regulation". Post ITV Digital, they introduced points penalties because they recognised the insolvency process was being abused, notably by Leicester. Since that time, they have produced a whole series of reactive measures, which fundamentally come back to this problem of financial instability. They already know there is a problem with the insolvency situation, otherwise we would not have the points penalty. They already know all this. UEFA already knows it, because it is a problem all over Europe. What UEFA has done—John Henry, the American guy who bought Liverpool, acknowledged it. He said that it has recognised there is a need for action a little ahead of everybody else. What Henry said, one of the reasons he bought Liverpool was he thought that financial fair play might create an environment where at least he would not lose his money. I think the football authorities privately already know that they are at a place now where something needs to be done; it is just the form of it. That is the part of the role of this Committee.

  Fundamentally, it comes back to quite a simple problem at the heart of all this, and the football creditors rule and all these other things are just the same: it is the question of how you can get these clubs to at least break even, because ultimately debt-financed success is financial doping. That is what it is. It is an attempt to rig the competition by spending more money than you generate. Therefore it goes against the entire sporting ethic, never mind financial common sense.

Q19 Paul Farrelly: Patrick, should the penalties be harsher?

Patrick Collins: Do you know, I think it touches on the fit and proper person test. If you had fit and proper people running football clubs, there would be fewer bankruptcies and administrations. The one that is always picked out is Portsmouth, of course. They had four different owners last year. This is one of the great stories of modern football. One was a fantasist who made lots of promises that were quite baseless. Another, much more intriguingly, it was reported, did not actually exist. People doubted the existence of this man. He was said to be a figment of somebody's imagination. I do not know how true that is, but that is how bizarre things became and yet everybody was deemed fit and healthy according to the Premier League. I find that bizarre, and I think much flows from that.

Q20 Paul Farrelly: One was the son of an arms dealer, as I recall.

Patrick Collins: It is reported, yes.

Q21 Damian Collins: Following on from the fit and proper person test, should there be sanctions against directors involved in a club that goes into administration? Without wishing to sort of pick on anyone in particular should, say, someone like Peter Ridsdale have been banned from football?

Sean Hamil: If you get a club into administration twice, you are banned now. I think one of the ex-directors of Rotherham was in that situation. That is something for the football authorities to decide. There is a wider issue about who should own the clubs and their competence to mange, but the fit and proper person test is certainly something that should be looked at. I don't think Thaksin Shinawatra was a fit and proper person. He obviously bought that club for purely political reasons. He spent all the money off a three-year TV deal in the first year. Potentially, he could have destabilised the whole competition. If they had gone bust halfway through the season when they could not pay their wages what would have happened? A team in the Belgium league last year dropped out halfway through and then there was 15 teams instead of 16 teams. There is an issue of sporting integrity there as well.

Professor Szymanski: You can impose all sorts of regulations but you will not change the fact about owning these clubs--these are honey pots, these are some of the most attractive assets in the world. Powerful people everywhere want to own them, and it is true in every country. Whatever regulations you impose, that is going to continue to be true. If a powerful person cannot get ownership directly, they will find proxies, or whatever way they can, to seize control of these assets, and there is going to be huge competition. My view is that it is better to have open competition and be able to see what is going on rather than have some of the rather less transparent systems. I emphasise that we have one of the most transparent systems of anywhere in the world. The finances of English football clubs are far more transparent, for example, than the finances of German football clubs, which I know everybody admires as the great model right now. I think that is crazy. Most of the German football club finances you cannot find anything out about, going back five years. French football, that is admired but it is not very transparent. The Americans have very stable systems but no transparency, so you cannot see what is going on. So I think it is more to do with rather than putting on more and more tests and regulations, it is creating transparency so that people know what is going on.

Q22 Damian Collins: We had a submission to the Committee from a law firm that does quite a lot of work with football clubs and they touched on points to do with tax, which Sean mentioned at the beginning of the session. I wonder whether this makes it a legitimate area for Government to look at because there were financial consequences for the Treasury. They talked about the level of tight financing and indebtedness of clubs that they said: "Had led to a practice of using cash set aside for Revenue & Customs as working capital for the club. In any other industry this is an incredibly serious offence that typically leads quickly to a winding-up petition and personal consequences for those involved." What are your comments on that?

Sean Hamil: What can I say? They are right. It should not have been allowed and it was allowed because football has the power to emotionally—I need to choose my words, but the non-payment of taxes as an unofficial overdraft was custom and practice and was tolerated within the industry, and HMRC didn't challenge it. Now, you could argue that it should have done, but in reality football should never have allowed that to come about because that was a sign of a club, or many clubs, out of their depth financially. It should never have been allowed and it is only in the last 18 months that that problem has been got to grips with and only because HMRC has said enough is enough. You might want to look at the Leeds case three years ago where there was a spectacular attempt to use the insolvency process in a way that personally I do not think was terribly edifying.

Q23 Damian Collins: From what you have said, it sounds like we could consider not necessarily special rules and regulations and extra burdens for footballs clubs but simply applying some of the normal business practices that everyone else has to work to?

Professor Szymanski: Absolutely. The more we treat these organisations as special cases, the more exemptions and loopholes we are going to create for them. So I would say, yes, as far as we can, accepting there is something special about the way sport is organised, but as far as possible let us treat them as ordinary business organisations to the extent that they are businesses.

Sean Hamil: A very clear area where sport is treated differently is in the collective selling of broadcasting rights. Anywhere else that would be an illegal cartel but it is recognised by everybody now, after two inquiries, that it is legitimate. There is a balance to be struck between what is appropriate, the specific regulation for the sector, and where it goes too far. I think the tax payment, everybody can see that that was not acceptable.

Chair: We have to move to our next session, but I thank the three of you very much for your evidence this morning.

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Prepared 29 July 2011