What is it that (mostly) saves sport clubs from bankruptcy?

Giuseppe Telesca
European University Institute, Florence

In The Economics of Shortage (1980), Hungarian economist János Kornai explained that one of the main features of Socialist economies – the hoarding of resources that generated perennial shortages – was due to the fact that state-owned enterprises were allowed to survive in spite of persistent losses. The assumption that, in case of insolvency, these enterprises would have been systematically bailed out by the mighty socialist government, induced their managers to hoard resources, using them inefficiently. In doing so, loss-making state-owned enterprises contributed to an overall loss of prosperity and wealth. Kornai’s seminal book, and many other works which followed, gave origin to the Soft Budget Constraints (henceforth SBC) framework, which describes a situation whereby a public enterprise, or a private company, is bailed out, even if insolvent, through the removal of one or more conditions which render budget constraints ‘a question of life and death’ for the company. These (hard) conditions are that the company is a price taker of input and output, that it cannot escape taxation, that it cannot have direct or indirect access to public or external investment for running the organization (except at the foundation), and that it doesn’t indulge in creative accounting practices to ‘cook the books’ and hide losses.

Not only has the SBC theory proved a useful tool to understand the functioning and limits of the command economies inspired by the Soviet model but, after the collapse of the Socialist block, it has been utilized to explore capitalist economies’ shortcomings – with particular emphasis on financial instability and the banking sector. More relevant for the book under scrutiny, the SBC theory has been largely used in the sport economics and management literature to make sense of the apparent paradox of European professional football clubs which rarely go bankrupt despite their tendency to accumulate persistent financial losses because of overspending on football players. The co-editors of Professional Team Sports and the Soft Budget Constraint have been among the first and most consistent advocates of the SBC theory applied to sports economics. This time they have put together a group of both established and young scholars with the aim – largely fulfilled – of pushing the boundaries of the SBC framework both empirically and theoretically, while drawing policy lessons from this exercise.

As a survey of top managers in these two countries reveals, there seems to be an ingrained conviction that bankruptcy is an unlikely outcome for the financial ‘antics’ often displayed by Hungarian and Polish professional football clubs to escape hard budget constraints.

From an empirical point of view, the central chapters of the book offer interesting insights. Chapter 4, dedicated to French football, looks at the SBC theory not from a league perspective, but from the viewpoint of the single clubs within the league. It is argued that the degree of constraints imposed to the budgets of big French football clubs are far softer than the ones imposed on smaller clubs. For the latter, persistent deficits can really represent ‘a question of life and death’ and result in failure. Chapters 5 and 6 look at the way in which football has evolved in Central and Eastern European (henceforth CEE) countries after the end of Socialism. Chapter 6 focuses on revenues, sporting performance, and social media interest in nine CEE countries. Here, despite a process of growing commercialization of the football industry, the authors identify several instances of SBC. Hungary, the country where the SBC theory was first elaborated, and Poland are the focus of chapter 5. As a survey of top managers in these two countries reveals, there seems to be an ingrained conviction that bankruptcy is an unlikely outcome for the financial ‘antics’ often displayed by Hungarian and Polish professional football clubs to escape hard budget constraints. This conviction goes hand in hand with a strong reliance on external aid in case of financial distress.

From a theoretical point of view, the last two chapters explore the limitations of the SBC framework. Chapter 8 looks at the limits of softness in professional team sport clubs through the lens of two high profile financial collapses: the football team Glasgow Rangers, in Scotland, and the Danish handball club Gudme-Oure-Gudbjerg. Both case studies provide ample evidence of repeated soft budged practices which, in the end, resulted in insolvency and liquidation despite the fact that both professional sport teams were considered too important for their communities to fail. The chapter argues that professional team sport clubs can survive long periods of insolvency, obtain additional credit, restructure debt, etc., but there is a point when indebtedness becomes simply too much to stomach. How much is too much will depend on many factors: from the status of the club to its sport performances, from the structure of the debt to the preferences of its creditors. In chapter 7 it is argued that an explanation of persistent insolvency in football not leading to bankrupt based on the SBC approach is ‘no more than an untested assumption’. Using data relative to the composition of the board of directors and head coach turnover in English professional football teams, it is argued that the financial instability of football does not stem from a failure of governance but from the wrong financial incentives linked to the system of promotion and relegation. Implicit to this critique there is another point: if the SBC framework has not insights to offer to the understanding of European professional football’s financial problems, there is no need for hardening the budget constraints. Consequently, the Financial Fair Play (henceforth FFP) regulation, introduced by UEFA in 2011, is not only useless, but also damaging, in that it protects big football teams from potential new competitors.

This point brings us to chapters 2 and 3 of the book, which are the most relevant when it comes to the policy lessons. Chapter 3, after providing an in-depth exploration of the sport economics and management literature that has used the SBC framework, explains what should be done to harden the SBC in football. Making use of theoretical insights, the author suggests interventions at club level (micro-level), regional, governmental and European level (macro-level), and league level (meso-level). The breadth of interventions required explains why this operation is nearly impossible to realize.  Chapter 2 discusses the merits and limits of the current FFP regulation, which was introduced not only to curb football clubs’ spending and render the different European football leagues more sustainable in the long run, but also to ensure a better competitive balance between and within the leagues, putting all the clubs under comparable financial constraints. The data, which mainly cover the period between 2012 and 2018, demonstrate a clear improvement of the European football industry when it comes to aggregate profits/loss, in the years following the introduction of the FFP regulation, which in many cases has been complemented by national regulations at league level. The improvement is more visible within the top earning leagues, while the benefits of the FFP regulation become less visible outside the Big Five leagues, or when the focus shifts to the second-tier leagues of the Big Five. The incomplete success of the FFP regulation induces the authors to question whether or not the football industry is capable of self-regulating itself and enforcing the regulation. By combining SBC theory and institutional theory, they answer negatively to this question, suggesting then that the fight against the tendency of football clubs to enhance their performances through the use of ‘financial doping’ should be conducted by an independent body, modelled over the World Anti-Doping Agency.

The co-editor’s appeal in the conclusion of chapter 1 to insist on the theoretical and empirical use of the SBC approach is well served by this fascinating book. Recent events such as Juventus’ penalization in the Italian Serie A for having used soft account practices to hide their persistent losses, or the investigation on Manchester City, charged with breaking FFP rules around 100 times over a nine-year period starting from 2009, represent a further reason to pursue this important avenue of research.

Copyright © Giuseppe Telesca 2023