Luke Johnson: The flaw in the model

The entrepreneur on his film about Greenspan's fatal mistake, why our obsession with property must end and how the Greek railway exposes the madness of the eurozone.

by Luke Johnson
Last Updated: 04 Jan 2011

I spent six years chairing Channel 4 Television partly so I wouldn't feel the need to lose money as a film producer. Now that I've retired from that wonderful institution, inevitably I have staked a bit of cash on producing a movie. I decided a little while ago that someone should tell the tale of the financial crisis on-screen, so I persuaded the brilliant producer Stephen Lambert to show me how it's done. He produced series such as The Power of Nightmares for the BBC and hits like Wife Swap and Secret Millionaire for Channel 4. In turn, he recruited Christopher Hird and director David Sington to our great undertaking. David made In the Shadow of the Moon, a terrific film about the Apollo astronauts.

Together, we've filmed a documentary about how the US property bubble inflated and then burst, and the devastating consequences for capitalist economies everywhere. It premieres at the Sheffield Doc/Fest in November and will then go on selected release in cinemas. It will also be available on DVD and eventually shown on television.

Getting involved has been an educational experience - both in trying to understand the Great Recession and also learning a little about how films are actually made. I hope a lot of people see the film - called The Flaw, after Alan Greenspan admitted his model was wrong - not because I expect to turn a profit, but rather because more citizens need to know how the financial system works, and how it can fall apart.

Another branch of showbusiness where I have become more involved recently is the theatre. This autumn, I am backing - in a modest way - four West End shows: Onassis, Krapp's Last Tape, Yes Minister and Deathtrap. It will be fascinating to see which of these succeed - and which do not. Financing commercial theatre seems to me a game of extremes: you tend to either lose all your money or see a fairly rapid return.

Drama and comedies such as the shows I've mentioned are much cheaper to put on than musicals, but the potential is similarly modest in comparison. Typically, a play costs £250,000 to stage, while a musical might need as much as £3m. Overall, live performance as a form of leisure activity has held up astonishingly well during the downturn, so we travel hopefully.

In most of these productions, I am working with brilliant partners, including Nick Salmon and Matt Byam-Shaw, two of the brightest impresarios I've met. Earlier this year, they branched out on their own with a venture called Playful Productions. I predict it will become one of the pre-eminent producing organisations in London within a short space of time.

Meanwhile, I am immersing myself in the research and writing of my annual chairman's speech at the AGM of the Royal Society for the encouragement of Arts, Manufactures and Commerce on 5 October. I have chosen as a theme the perils of property. To a great extent, this downturn was created by an almighty housing boom - especially in the US, but also in places such as Ireland and Spain. A fixation with real estate and home ownership has almost buried hundreds of millions of citizens in the west with debt, and nearly bankrupted the entire banking system.

Britain appears to have escaped the worst of the crisis so far, but our obsession with housing has still damaged our competitiveness and compounded inequalities. We must change our ways and channel more savings into productive industry rather than second homes and buy-to-let portfolios. This shift requires changes to our culture, economy and legal and tax systems.

It seems medieval that we still consider land and buildings the only place to spend money. and they're a predominant store of value for too many families. A cure should be found for this disease before it drags us into Japanese-style stagnation.

I have always been an EU and euro sceptic so I am not surprised at events in Greece. It is a beautiful country, but the idea that Greece is as creditworthy as Germany was certain to lead to disaster. You only have to look at its national train company for a case study in how dangerous European monetary union really is.

Hellenic Railways wins my award for the most preposterous organisation of the year. It loses roughly EUR1bn annually on revenues of just EUR200m. That's right - its yearly deficit is five times its turnover. It carries a vast debt load of EUR10bn - or 5% of Greece's GDP - because misguided foreign investors believed the Greek government would never permit it to fail - and the EU would never permit Greece to fail.

The rail business is effectively a demented job scheme, where the average salary is more than EUR60,000, with train drivers earning twice that. During the past decade, the company's labour costs have risen by 50%, even though staff numbers have shrunk by 30%. This is the consequence of permitting a profligate nation to 'borrow' the bank guarantee of a disciplined one. A little like lending money to an impoverished aristocrat with a gambling addiction and assuming that his rich relatives will always bail him out.

Despite billions of euros invested in recent years and a massive operating subsidy, Hellenic Railways remains inefficient and uncompetitive compared to road transport. It is a union fiefdom that must eventually undergo profound structural reform - just like the undemocratic EU itself. And the sooner that painful but necessary change comes, the better for the citizens of Europe.

- Luke Johnson is chairman of Risk Capital Partners

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