The most popular sport in the world: football. What else?! Huge games and salaries to match. But is it really as glamorous as we think? We may see some top players receiving a salary per week that most people can’t hope to come close to in a year, but players at Portsmouth have had to go without their wages on three occasions, as the club entered financial strife. It is these high salaries that prevent many clubs from breaking even, let alone making a profit. Whilst a lack of salary to footballers is a rare occurence, the football industry isn’t the money-churning machine that it appears to be.
We’re used to seeing full stadia and fans decked out in their club’s regalia, so surely football clubs are awash with money? But things aren’t so rosy. Research published by the Centre for the International Business of Sport at Coventry University in 2008 revealed that clubs in the top four tiers of English football between the 2001/2 and 2005/6 seasons made an aggregated loss of more than £1bn. In addition, 56 clubs in the English leagues went bankrupt between the Insolvency Act’s introduction in 1986 and June 2008.
We’ve seen a number of buyouts of clubs in recent years by extremely wealthy families. The Glazer family bought Manchester United in 2005, yet this buyout and many others are heavily leveraged and servicing their debts is now proving a problem. Whilst some clubs publish annual profits, it doesn’t mean they are without debt. Manchester United, defending champions of the English football league, earned profits of £48.2 million in the 2008/9 season, but its debts are estimated at around £700 million. The club received a loan of £509.5 million and had to pay £41.9 million in interest.
The owners of Chelsea and Manchester City have recently converted £340 million and £304.9 million of loans into equity respectively. Financiers, however, say this is simply “moving money from their left pocket to the right”. Manchester City reported a massive loss of £92.6 million for the 2008/9 financial year. Unfortunately for them, these figures ignore outlays since May 2009 for Carlos Tevez, Kolo Toure and Emmanuel Adebayor. Portsmouth’s £7 million share of TV revenue has been diverted directly to other clubs to whom they owe money for transfers.
So, how much of a money-maker is football? Well stadia are still full and it’s certainly growing in popularity in Asia. Premier teams are now appreciating how much money can be made out there by selling television rights. However, in 2008 the FA chairman Lord Triesman still estimated that English football debts stood at £3bn. With all this debt, are there any positives? Just one – at least it’s less than the UK’s public debt!
Abu-Dhabi family reduce debt for Manchester City Campden FB (7/1/10)
Manchester City post massive loss BBC News (6/1/10)
What a waste of money – the Premier League’s best paid flops Guardian, Jamie Jackson (10/1/10)
Portsmouth players still not paid as Premier League expresses concern at crisis Telegraph, Paul Kelso (6/1/10)
Paying by the rules The Lawyer, Adam Plainer (11/1/10)
Jacob unimpressed by fan protests Press Association (11/1/09)
Cardiff City to face winding up order BBC Sport (8/1/10)
Debt swap is ‘window dressing’ The Independent, Nick Clark (7/1/10)
Manchester United aim to raise £500m in bond sale in bid to reduce mounting debt Telegraph, Mark Ogden (11/1/10)
Chelsea debt wiped off by Roman Abramovich but club still record loss Telegraph (30/12/09)
Manchester United to raise £500m BBC News (11/1/10)
Cristiano Ronaldo saves Man-Utd – Again Sky News (11/1/10)
Tony Fernandes and David Sullivan vie for control of West Ham Telegraph, Jason Burt (16/1/10)
One thing at Manchester United isn’t going downhill – their debt Guardian, David Conn (6/1/10)
Premier League looks to cash in on Asia BBC News, Guy de Launey (29/12/09)
Questions
- Why do footballers receive such high wages? Illustrate why wages in the Premier League are so much higher than those received by players in non-league teams. What’s the key factor?
- What is debt swapping?
- In the Independent article: ‘Dept swap is Window dressing’, what does it mean by (a) window dressing and (b) debt swap is ‘moving money from their left pocket to the right’?
- How can a club such as Manchester United record a profit, but have substantial debts?
- What is leveraging and why is it a problem for some football teams?
- How will an issue of bonds enable a football club to refinance its debt?
- What opportunities does Asia present to English football?
Increasing traffic on the roads is observable by everyone and government policy is focused on reducing the demand for road space, rather than increasing its supply. One method has been to improve public transport and make it a viable substitute for car travel. Private costs of motoring have increased, but if there is no viable alternative, people will continue to demand car travel. Investment in buses and trains has improved their quality: they are more frequent, more reliable, arguably more comfortable and supposed to be part of an integrated transport policy. Local bus services provide a crucial link for local communities, but it is these services that are now facing problems.
In your economics lectures, you may have looked at local bus services, when you considered monopolies, oligopolies and possibly contestable markets. Oligopolies, whilst closer to the monopoly end of the market spectrum can be very competitive, but are also open to collusion and anti-competitive practices. The local bus sector has been referred to the Competition Commission by the Office of Fair Trading through complaints of ‘predatory tactics’ by companies. It is argued that local bus services, by limiting competition, are causing prices to rise and the quality of service to fall. One key issue is that those companies established in the market are alleged to be acting aggressively towards smaller bus companies and thus reducing competition in the industry. A low number of bids for supported service contracts in many areas, local bus routes dominated by a few large companies and predatory actions by incumbent firms are all complaints that this industry is facing.
This investigation is especially important, given the amount of public money that goes into the bus industry: £1.2bn. Investigations found that in areas of limited competition, prices were 9p higher. A number of take-overs have contributed to this situation. Two-thirds of bus services are controlled by only five operators. This limits competition in the market and hence is argued to be against public interest. Yet, industry representatives still argue that the market is competitive. Read the following articles and answer the questions about this issue. Was the OFT right to to initiate this investigation?
Local buses to be re-regulated BBC News (27/9/09)
OFT refers UK bus market to Competition Commission Dow Jones Newswires, Kaveri Nihthyananthan (7/1/10)
Office of Fair Trading prompts probe into bus services Guardian (7/1/10)
Trasport groups fear OFT competition probe over buses Telegraph, Alistair Osborne (4/1/10)
Bus industry competition queried BBC News (20/8/09)
OFT refers bus industry on poor service and prices Times Online, Francesca Steele (7/1/10)
Inquiry into local bus market ‘may delay investment’ Scotsman, Hamish Rutherford (5/1/10)
Questions
- Why are local bus services argued to be (a) a monopoly; (b) an oligopoly?
- What are the main aspects of UK competition policy?
- What is a concentration ratio and how does this apply to the bus industry?
- What predatory tactics are being used in the local bus industry and how do they affect competition, prices and quality?
- Why may limited competition be against the public interest?
- Traffic congestion is a major problem. Explain the economic theory behind government intervention in this area. Think about the effects of taxes; building more roads; investment in substitutes. Which is likely to be the most effective method?
On 26 November, the water industry regulator, Ofwat, published its decisions on the price caps that will apply to all the 21 water companies covering 23 areas in England and Wales from 2010 to 2015. Despite calling for average cuts of £14 in draft proposals released back in July, Ofwat is now requiring an average cut of just £3. This still means that average water prices will be some 10 per cent lower than those sought by the water companies. Note that all these figures are in real terms: i.e. after taking inflation (or deflation) into account.
But while customers in some areas will see their bills frozen in real terms, or even significantly cut, others will see a rise in theirs. The average price change varies from a fall of 7 per cent in Wales, East Anglia and Portsmouth to a rise of 13 per cent in Essex and Suffolk. There is also variation within regions, depending on factors such as whether or not you have a water meter. Thus, in the South West, customers without a meter could see a rise in bills of 29 per cent.
Not surprisingly, Ofwat’s decisions have received mixed reactions. The water companies claim that the price cap is too high to allow them to make the necessary investment in water infrastructure, such as replacing old pipes to cut down on leakages. Water customers, on the other hand, claim that Ofwat has been ‘captured’ by the industry and, as a result, has been much too lenient.
So who is right? And is the current system of 23 separate regional monopolies, regulated through price cap regulation, the best way of structuring and running the water industry? The following articles and videos look at the issues
Ofwat delivers flat bills for customers Ofwat news release (26/11/09)
Ofwat Publishes Its Decisions Regarding The Prices To Be Charged By Water And Sewerage Companies eGov Monitor (26/11/09)
Water prices to remain flat Financial Times, William MacNamara (26/11/09)
Water bills in England and Wales to be cut (including video) BBC News (26/11/09)
Water price cuts ‘could stop leak programmes’ BBC Today Programme (26/11/09)
The Big Question: Should water bills be going down even further than they are? Independent, Martin Hickman (27/11/09)
Water boys the winners with Ofwat? Independent, James Moore (27/11/09)
Households face higher than expected water bills Telegraph, Myra Butterworth (26/11/09)
There’s trouble in the pipeline as Ofwat boss fails to spot the cracks Telegraph, Damian Reece (27/11/09)
Water bills set to drop by only £3 a year Guardian, Tim Webb (26/11/09)
Regulator must find better way to fix water prices Guardian, Nils Pratley (26/11/09)
Water regulator bows to lobbying on bill price cuts (including video) Times Online, Peter Stiff (26/11/09)
Ofwat ruling on water bills will hit millions of unmetered homes Times Online, Robin Pagnamenta (27/11/09)
Water company shares buoyant after Ofwat ruling Guardian, Market Forces blog, Nick Fletcher (26/11/09)
Severn Trent leads water company shares higher after regulator’s review Telegraph (26/11/09)
The full report can be accessed from the Ofwat site at:
Final determinations on price limits Ofwat (26/11/09)
Questions
- Is price cap regulation of the RPI–X variety the best form of regulation? Explain with reference to both incentives and the issue of uncertainty.
- Explain whether water companies are natural monopolies.
- To what extent can competition be introduced into privatised utility industries as an alternative to regulation? Is increased competition a practical alternative to price cap regulation in the water industry?
- What are the arguments for and against installing water meters in each home so that people pay per litre used rather than paying a flat charge depending on the property value?
- Explain what is meant by ‘regulatory capture’. Is there evidence of regulatory capture in the water industry? Consider with respect to the November 26 ruling.
The housing market has been very volatile over the past year or so. House prices crashed, but then appeared to stabilise. Since then, however, different sources have given very different opinions and predictions about future movements. According to Nationwide Building Society, house prices have increased by an average of £53 a day during September, but others suggest that they remain stable and that they may fall again in 2010.
Not only are house prices important to those buying and selling, but the state of the housing market is also crucial for the recovery of the economy. For example, the construction industry has suffered over the past year and, as of the 2nd October 2009, unemployment in this sector stood at 17.1%. As more and more workers lose their jobs, their disposable income falls and hence demand in the economy is affected. With the possibility of an election debate between the party leaders, many will be waiting to see what their strategies are to revitalise a struggling economy.
House prices rise an average of £53 a day’ Daily Record, Clinton Manning (3/10/09)
Mortgage approvals dip in August BBC News (29/9/09)
Construction contracts at slowest pace for seven months Construction News, Nick Whitten (5/5/09)
House sales ‘stalled’ in August BBC News (22/9/09)
Housing market needs ‘feel-good’ factor to recover City Wire, Nicholas Paler (26/6/09)
Double whammy for first-timers as prices stabilise and loans dry up Scotsman, Jeff Salway (3/10/09)
Head-to-head view on house prices BBC News, Kevin Peachey (27/8/09)
UK construction industry still contracting, says Cips Guardian, Kathryn Hopkins (2/10/09)
House prices see ‘slight decline’ BBC News (28/9/09)
House prices ‘back to 2008 level’ BBC News (2/10/09)
Construction unemployment rises to 17.1% HomeTown Sources (2/10/09)
House prices up – but so are insolvencies Management Today (2/10/09)
Financial shadow cast by city apartments BBC News (8/10/09)
For house price data see:
Nationwide House Prices
Halifax House Price Index from the Lloyds Banking Group
Housing Market and House Prices from the Department of Communites and Local Government
Questions
- Why are recent movements in the housing market going to be a problem for first-time buyers?
- The ‘Stamp duty holiday’ will soon come to an end. What do you think will be the impact on the demand for and supply of houses and hence equilibrium prices over the next 6 months?
- One of the reasons why house prices have stabilised is a lack of supply. How does this affect equilibrium prices?
- Why is the economy so affected by changes in house prices? Think about what happens when construction workers lose their jobs and how this affects aggregate demand. Then consider how the macroeconomy will be affected.
- When demand for houses increases, why do prices increase so rapidly? Consider elasticity.
Up until a year ago, milk and cheese prices were soaring woldwide (see Cheddar – the king of cheeses at £2000 per tonne). A surging world economy and rapidly growing demand from China and India were driving up commodity prices, including milk and milk-based producs. In the UK, average farmgate prices for milk had risen from 19 pence per litre (ppl) in 2006 to 27.4ppl by October 2008 (see here for data). Since then, however, as the global economy has plunged into recession, milk prices have fallen. By September 2009, the farmgate price had fallen by over 18 per cent to around 22.4ppl. With rising costs for fuel and cattle feed, many dairy farmers are now making a loss and are either quitting, or considering quitting, the industry.
It’s a similar story in Europe, North America and other dairy producing regions of the world. In Europe “the mood is turning sour. Last week 300 tractors dragged milk containers over fields in southern Belgium, dumping a day’s worth of production (see video). Similar protests were made in Germany, France, the Netherlands and Luxembourg. The crisis has driven many EU farmers into a ‘milk strike’, with thousands refusing to deliver to the industrial dairy conglomerates that produce everything from skimmed milk to processed cheese.”
So is this just market forces in action and will prices rise again as the world economy recovers? Or is it a reflection, in part, of the monopsony power of the supermarkets and the milk processing industry? The following articles look at the issues, both in the UK and the rest of Europe and in the USA.
Milk ‘strikes’ and shortages hit Europe as UK dairy industry reels from crisis Observer (20/9/09)
German agriculture ministers meet as European milk crisis escalates Deutsche Welle (17/9/09)
EU Milk Strike Joined by More Than 60,000 Farmers, Group Says Bloomberg (18/9/09)
EU to boost aid for dairy farms BBC News (17/9/09)
Milk: Commission proposes further measures to help dairy sector in short, medium and long term European Commission Press Release (17/9/09)
Milk output fell in August as dairies cut herds Chicago Daily Herald (19/9/09)
New England tries to save dairies The News Journal (Delaware) (20/9/09)
Questions
- For what reasons are many dairy farmers now making a loss?
- For what reasons has the power balance in the wholesale milk market shifted towards milk purchasers (such as supermarkets) and away from farmers?
- How would a phased liberalisation of EU milk production help the UK’s dairy farmers?
- Discuss the likely effectiveness of the European Commission’ proposed measures to help dairy sector in short, medium and long term.
- What is likely to happen to milk prices over the next two years and what will be the likely effect on supply? Explain your answer and consider the relevance of price elasticity of supply.
- “Agriculture officials and farmers in Vermont, New Hampshire and Massachusetts have launched a program called Keep Local Farms. … Organizers say they hope to appeal to consumers’ growing taste for local foods” (see final linked article above). What determines the likely effectiveness of such ‘buy local’ movements? What incentives are there for people to buy local? If countries in general encourage people to buy local, is this a zero sum game? Explain.