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It has not been a good year for the Feacutedeacuteration Internationale de Football Association, commonly known as Fifa.

Five of its top 14 commercial partners have left in the past six months amid widespread allegations of corruption at the football body.

Castrol, Continental and Johnson amp Johnson have joined top-tier sponsors Sony and Emirates in not renewing their Fifa deals.

Recently we saw the arrest of 14 high ranking soccer officials and sports marketing executives accused of being “engaged in bribery to decide who would televise games, where the games would be held, and who would run the organisation overseeing organised soccer worldwide”. For the American authorities this is “the beginning of our effort, not the end”. Hours after the arrests, Sepp Blatter was re-elected as Fifa president only to step down three days later.

But what do we know about Fifa’s operating model that has become the envy of many and got tongues wagging on the amount of cash this association generates and the influence it exerts globally. Founded in 1904, and based in Zurich, Fifa is registered as a non-profit association governed by Swiss law. It currently has 209 football association members and is committed to the improvement of football by investing the money it earns back into the sport.

The association is obligated to run a balanced budget and it does not pay any dividends. While the soccer body is officially a non-profit association, it is viewed by many as a multibillion-dollar “company”.

It started as a member-only association depending on member fees but began commercialising international soccer in the mid-1970s under the leadership of Joatildeo Havelange. During this early stage of commercialisation, earnings were generated from sponsors like Coca-Cola and Adidas and later from Fifa’s own merchandising activities.

Earnings growth was boosted from the 1980s on the back of lucrative TV rights for the World Cup. In addition, Fifa enjoys huge tax benefits at home and in the World Cup hosting countries. A country that wants to win the World Cup bid is required to grant Fifa full tax exemptions. What it means is that a hosting country must agree to forgo tens, if not hundreds of million dollars in tax for the benefit of Fifa, an organisation which enjoys favourable home country income tax at 4,25%, further adjusted for the four-year operating cycle.

A snap preview of Fifa’s financial numbers tell us the real story behind this commercialisation of football. Fifa generates much of its income from television broadcasting rights, marketing rights and other rights (such as hospitality and licensing). The operating period for Fifa coincides with the four-year World Cup cycle.

In the 2011-14 cycle, which culminated in the 2014 World Cup Brazil, Fifa made a total income of $5,7 billion of which $2,5 billion was from television broadcasting rights, $1,6 billion from marketing rights and $1,5 billion from other sources. During that period, its partners included Adidas, Coca-Cola, HyundaiKIA, Emirates, Sony and Visa. The 2011-14 income represents a 36,5% increase from the $4,2 billion earned during the 2007-10 cycle. The 2007-10 operating cycle culminated in the 2010 World Cup South Africa.

In compliance with the Swiss law of associations, Fifa spends much of its income on numerous football development activities and events. During the 2011-14 cycle, 72% ($3,9 billion) of Fifa’s expenditure was on soccer development activities and events, and the balance on other operating activities. Operating expenses include World Cup prize money.

Fifa paid $358 million (2010: $348 million) in prize money to the 32 participating teams, with prizes ranging from $35 million (for the winners, Germany) to $8 million (for each of the 17th to the 32nd placed teams). While it is technically supposed to be a non-profit organisation, Fifa made a surplus of $338 million and has accumulated cash reserves of $1,5 billion.

Our analysis show that Fifa’s business model has been underpinned by highly priced sponsorship and partnership packages, the fact that virtually all the World Cup revenue goes to Fifa with little left to the hosting country, relatively small prize money and that hosting countries foot much of the bill to host the tournament (through expenditure on the stadia, related infrastructure and services, and tax exemptions, etc.)

For the first time ever and ahead of the 2018 and 2022 World Cup, Fifa will offer companies the opportunity to purchase regional sponsorship packages in addition to the current two-tier sponsorship structure. The first two-tier accommodates 14 sponsor organisations. The third tier has been transformed from national supporters — limited to companies within the host country — to regional supporters, which will cover five pre-defined regions around the globe. The 2018 World Cup is expected to earn at least $5 billion on the back of the broadcasting deals and the new Fifa sponsorship structure.

Undoubtedly, Fifa has been tainted by the on-going corruption allegations and investigations, and the outcome therefrom will have far-reaching implications on Fifa as a business and as an association. While a number of sponsors have let their sponsorship deals lapse, sponsors like Adidas, Visa, Budweiser and McDonald’s are upbeat that Blatter’s resignation is a step in the right direction for restructuring and reputational reformation at Fifa.

Obviously, there will be a re-look at how Fifa operates — from the structure and composition of the executive committee to the process of awarding World Cup hosting. But still, international soccer remains big business for Fifa.

Nesbert Ruwo (CFA) and Jotham Makarudze (CFA) are investment professionals based in South Africa. They can be contacted on media@opportunvest.co.za

Source : Zimbabwe Standard