Written evidence submitted by Dr Adam Cox and Christina Philippou
DCMS Committee 2020: Sport in our communities – Written evidence by Dr Adam Cox and Christina Philippou, November 2020
Dr Adam Cox and Christina Philippou are principal lecturers at the University of Portsmouth’s Faculty of Business and Law, and the current submission is based on their research. Dr Adam Cox is an economist and Christina Philippou is a Chartered Accountant; their work focuses on sport economics and finance, and governance and corruption in sport.
- The current sport governance models are not fit for purpose as governing bodies have fractured responsibilities across clubs and leagues (even within sports), are lacking in regulation and diversity, and need to be reviewed. Providing financial support for distribution by these bodies should come with accountability conditions attached to the funds.
- The need for financial support within sports leagues arises from how competition is organised i.e. promotion and relegation. It causes sports clubs to overexert their financial resources to achieve sporting success without sufficient financial return. Financial support packages are not likely to alleviate the issue.
- We propose a tax on elite leagues (which allows them to act purely in their own interest) to aid the debate of the extent that elite leagues should support lower leagues and grassroots. Any financial support provided by elite leagues should consider both the benefits and the costs to them, with further funding required by community clubs coming from alternative sources.
- Our proposal for an amount of taxation that is viable is that resources taken from elite leagues are equal to the benefit they receive from the lower leagues and grassroots (for example, talent development and community building) less the costs (for example, loss of broadcasting revenues due to weakened global position). At present, little is known about the precise financial value of these elements. Further funding may be required by government to top this funding up to the amount required to maintain community club benefits to society.
- Without proper measures and governance in place, additional financial support can exacerbate the existing problems of financial fragility at all levels.
Are current sport governance models fit for purpose?
- There are a variety of sport governance models across both professional and grassroots sport. For example, rugby union has a number of governing organisations depending on the level, including the RFU (for English national team and grassroots, as well as rules of the game), the Welsh Rugby Union, Scottish Rugby, the IRFU (which covers two countries), and Premiership Rugby (for the top league of professional rugby). Similarly split governance structures exist for other sports, with football in England split into at least three (the FA for the national team and grassroots, and the Premier League and EFL for different levels of professional competition). Split governance structures complicates decision-making over allocation and monitoring of funds allocated down from elite leagues to community clubs.
- Unlike other industries that significantly affect the public (financial institutions, medicine, water, telecoms, education, etc), sport does not have an independent regulator. Taking football as an example, the FA is often considered the English football regulator. However, they are not independent, as they are in direct competition with the professional leagues for sponsorship and national team players’ time. Concerns around the FA and its ability to govern have also been previously raised in Parliament.
- Self-regulation by sport governing bodies for each sport is taken for granted as a right of the industry. This is linked to the historical argument that sport deserves special treatment as an industry, which is in turn reflected in international law under the concept of “autonomy”. Arguments in favour of this concept note that sport has specific traits which include its function as a public good (i.e. something that is more valuable to society as a whole than individuals are willing to pay for it). This argument has been used by sport to request and receive government funds for stadiums and large events. However, these elements are eroding, with what was once 10 unique features of the sport industry in the 1990s reduced to just four by 2010. Those full remaining features are:
- The need to maintain competitive balance with minimum levels of quality;
- Anti-competitive behaviour being allowed under law;
- Levels of scrutiny afforded to players and managers; and
- Treatment of employees as assets (with controls over movement between clubs).
- There are a number of industries (particularly in the entertainment sector) where the last three of these apply. Arguments against self-regulation include the fact that sport has been subject to intense professionalisation and commercialisation through the emergence of broadcast rights and sponsorship agreements since the 90s which continued to grow prior to the pandemic. Globalisation has increased the reach of sport, and sponsorship now affects clubs from professional leagues down to grassroots level, from kits to venue names. Sponsors are harder to find in a recession, and this is more likely to affect grassroots clubs as they do not typically have sponsorship contracts covering many years, as the professional clubs and leagues do. They are also more likely to be dependent on local (rather than multinational) sponsors, who are themselves more likely to be hit in a recession.
- Despite the tax paid by the sport industry, there have also been losses. For example, the football industry has been linked to tax avoidance and evasion, and there have been multiple instances of winding up petitions issued by HMRC to sports clubs in professional leagues for failure to pay tax (e.g Southend United, Macclesfield Town). Lost taxes also come from teams folding, both at the professional levels (such as the London City Royals in the BBL) and at grassroots levels.
- From a funder’s perspective, financial viability is a key consideration of whether the current sport governance models are fit for purpose. Salary caps have been introduced in a number of sports leagues (including rugby, cricket and football), although these apply to professional or semi-professional leagues rather than grassroots participation clubs. The issue is clouded by the fact that many of the professional and semi-professional clubs also run community and grassroots participation clubs. Further complications arise as some community clubs, particularly for non-standard participants (e.g. walking basketball), do not participate in leagues but still provide benefit to society.
- Suggested solutions to governance problems include:
- There are limited sport governance codes globally (examples include those issued by Sport Australia, Sport New Zealand, and the European Commission). The U.K.’s A Code for Sport Governance is based on the UK Corporate Governance Code and is in place for sports organisations wishing to obtain government funding. Since its introduction, it has led to some positive governance changes in the industry. All sports organisations (from national to professional to grassroots) in receipt of public money should follow this tiered code. How this would be enforced would have to be considered in any decision of support.
- Some sports have started to implement their own governance to deal with financial and other governance concerns. Aside from the introduction of salary caps, there has been an increased urgency around monitoring and compliance (such as the recently introduced FIFA Compliance Handbook which does not, however, cover clubs) and the FA’s Code of Governance for County FAs.
- While Covid-19 has been disruptive to all sectors of the economy, it has disproportionally affected women’s sport. Given that gender diversity is a key element of good governance, and the availability of role models affects participation (which in turn provides some benefit for society and is linked to decreased public spending on health), whether community clubs also offer women’s, girls’, or disability sport should also be taken into account.
- Diversity’s link to good governance also extends to racial, ethnic, and cultural differences. Some sports embrace this more than others, and there are some attempts to address these issues. For example, the FA has recently released their Football Leadership Diversity Code, although there have been some concerns raised around its implementation and accountability.
At what level of sport should the government consider spending public money?
- The debate around what level the government should consider spending public money should include evaluation of some elements listed below.
- From a governance perspective, the affected parties (stakeholders) should be considered. Sport has a large and varied list of these, including clubs and related businesses (match day vendors, kit manufacturers, pitch hire facilities, broadcasters, professional service providers etc.) and their employees, customers (sports fans that pay to watch sport either live or via a broadcast, grassroots players that pay to participate in sports activities at their clubs, and active individuals that invest in sportswear and sports gear), volunteers, and others.
- Financial governance should also be linked to commercial viability of both the community club itself and its governing body, as well as the potential growth of the sport. For example, netball, cricket, and basketball have all engaged with traditionally less sporting (particularly female and BAME) sections of society and therefore have potential to solve some of the diversity governance problems discussed above.
- While financial levels should be governed by economics (see below), the current sport governance models are not fit for purpose and need to be reviewed.
To what extent should elite professional sports support the lower leagues and grassroots? How should the Government make this happen?
- While we focus on men's football to demonstrate the principles, the points raised can apply more widely to other sports leagues.
- Financial support can be considered as a form of taxation i.e. a transfer of money from wealthier leagues to less wealthy for the benefit of all leagues. Currently, this type of transaction is facilitated by the Football Foundation, transferring monies from the English Premier League to Step 1-6 and grassroots leagues via a variety of grants and projects.
Sporting contests and financial return
- The need for financial support within sports leagues stems from the organisation of the sporting competition, i.e. promotion and relegation. The opportunity of promotion and the fear of relegation causes sports clubs to overexert their financial resources to elevate their sporting success relative to competing clubs. However, such additional costs tend to be without sufficient financial return.
- For example, Queens Park Rangers football club spent between 112% and 183% of revenue on players wages in each season in 2008-2011 in order to gain promotion into the Premier League in 2011. They were relegated at the end of 2012-13, where they had spent an average of 72% of revenue on player wages in those two seasons.
- Financial regulation, revenue sharing, or support packages are unlikely to alleviate the desire for sports clubs to overexert financial resources in order to win matches.
Optimal amount of financial support
- The optimal amount of taxation that benefits society overall can be calculated, subject to a series of constraints. This calculation has been of interest to researchers and policy-makers for some time. There has been some research that considers a tax on elite clubs, but not, to our knowledge, any research focussing on the optimal taxation needed to support lower leagues. Without the support of such research, the amount of financial support an elite league could provide would have to be calculated assuming that the league would act in its own self-interest. Anything beyond that could have the negative impacts on the elite leagues (as discussed below) and an argument can be made that any need for funding beyond this (to reflect community club benefits to society) could be supplemented by direct government funding not originating from the elite leagues.
- A calculation of the amount of financial resources to be taken from elite leagues should take into account the costs and benefits of providing this support to other leagues. The resource should be equal to the benefit the lower leagues and grassroots provide to the elite league, less the costs of forgoing the financial input. This way, the elite league is acting in their own best interest, without the need for altruistic donations. Examples of both costs and benefits to the Premier League of providing financial support provided below are not exhaustive.
- Lower leagues and grassroots clubs help to build or reinforce social and economic benefit in local communities across the country. These leagues likely have a large value to society as well as directly to the elite leagues themselves. For example, those participating in or watching football are also most likely to be the key fan base that underpins demand for Premier League football through matchday, merchandising, and domestic broadcasting revenue streams. Thus, it is important to recognise that without the clubs or leagues at lower levels, interest in the elite level of the sport could diminish in the long run.
- Elite leagues often employ playing talent who are trained and fostered in lower leagues. It could be argued that the value of this talent development is already included in the players’ market price of agreed transfer fees. However, it is usual to expect that less available labour could increase market wages, other things held constant. If playing talent is scarcer, then football clubs could see player wages bid upwards.
- A strong football community and fan base along with depth in supply of playing talent are key benefits of lower leagues and grassroots. These benefits could be recognised by elite leagues in the form of financial support.
- Elite leagues such as the Premier League compete against other football leagues globally (Serie A, Bundesliga, etc.) to sell exclusive rights to broadcast matches. If a tax reduces the financial power of Premier League clubs, this could limit their ability to attract star players. This would, in turn, reduce the league’s attractiveness as a spectacle and could lead to a fall in revenues from the sale of broadcast rights.
- In addition, unlike most other industries, professional sport requires the coordination between competing clubs to produce the main product for sale, in this case the spectacle of a sports event. A tax placed on Premier League clubs could alter the competitive balance within the league. Reducing competitive balance could reduce demand for the spectacle and thus cause revenues from the sale of broadcast rights to fall.
- The competitive balance between teams within the Premier League, alongside the quality and number of star players on show, are key to getting the most revenue possible from the sale of broadcast rights. If diverting financial resources away from the Premier League weakens these components, then the demand for watching matches could fall and, in turn, so could the revenue from the sale of rights.
- At present, little is known about the precise financial value of community building or potential revenue loss of this support. However, the appropriate level of financial resource an elite league can provide without weakening the league can be identified.
What to tax
- From economic theory, the most appropriate policy is to place a tax on revenue that is considered as “economic rent”. This is revenue that does not provide incentive for existing, so removing this extra part as a tax would not affect whether the sporting product is supplied in the first place. Whilst it is not a perfect example of economic rent, for the Premier League, the closest matching revenue stream is from the sale of broadcast rights. Without broadcasting revenues, a football match would otherwise continue to be played. The quality of playing talent on show will likely be altered, however.
Effect of sharing financial resources
- It is important to carefully consider which leagues are to be providing support and which leagues are to be the beneficiaries. Within the English football leagues, Step 1 (National League) and 2 (National League North and South) clubs are considered “elite” yet they likely need financial support. The majority of clubs within those leagues make a financial loss each year. During the 2018/19 season 21 out of 24 Step 1 clubs made losses totalling £318,000 a week across the division.
- There is a wealth of research surrounding the impact of sharing financial resources in sports leagues. Clubs receiving such financial support are likely to change their behaviour by decreasing or increasing the amount invested in playing talent, depending on other circumstances. If the amount of financial support is large enough compared to the recipient’s existing revenue, it could be expected that the club would spend more on playing talent. Therefore, providing support should not exceed this amount or it will increase spending beyond the pre-pandemic (or potential growth or sustainable) levels.
- If it is desirable for such financial support to be used in particular ways, then continuing with a project-based support system, such as the Football Foundation, would be beneficial.
Summary and solutions
- The current sport governance models are not fit for purpose. Providing financial support for distribution by these bodies should depend on the financial power and potential for growth of the sport. It should come with accountability conditions attached to the funds, including around monitoring and diversity.
- The financial support provided to community clubs should consider both the benefits and the costs to the elite leagues. Valuations should be conducted over the benefit elite leagues receive from the lower leagues and grassroots, as well as the opportunity costs of funding them, and care should be taken for that support not to enhance already unsustainable financial losses in some leagues and community clubs.