View from City Road: BT3 sale incentives are an unhealthy hang-up

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The Independent Online
Why bother offering incentives on BT at all? Stephen Dorrell, Financial Secretary to the Treasury, says they are traditional, but this is not a good enough reason for spending taxpayers' money.

Fortunately, the value of incentives - 10p off both the second and third instalments - has come down since the last time the Government sold any shares in BT. The cost is about pounds 134m - assuming 50 per cent of the offer is subject to discounts - or pounds 40m less than for BT2. But that does not mean they are justified.

Despite confusing advertisements - the best Mr Dorrell could say for Inspector Morose was that he made people sit up and watch - the sale is bound to be popular. There is reviving interest in the stock market anyway, thanks to falling returns on other investments. Savers are already moving their money from building societies to unit trusts and shares.

The initial yield on the first 150p instalment is a mouth-watering 7.9 per cent, which should be enough to persuade even the most reluctant risk-takers to take the plunge, with or without incentives. This takes into account only the final dividend; the interim will be payable next spring at about the time when shareholders will have to pay the second instalment on their shares.

Why then is the Government still offering a discount to individual shareholders? It is arguable that retail interest is helping to keep BT's share price high and so boost proceeds for the Government. Left to themselves, the institutions would knock the price so they can buy cheap, or so the theory goes.

But SG Warburg is promising to reward large investors who buy more shares in the lead-up to the sale and penalise those who sell, which should support the price without help from retail investors.

The Government remains hung up on the idea of wider share ownership, something that it has signally failed to achieve in 14 years of trying. Not only has the number of shareholders fallen from its peak of more than 11 million to 9.3 million, but more important, the number of investors who own portfolios of more than 10 shares - the minimum to spread risks - has barely changed. It was just 400,000 at the last count.

Incentives encourage newcomers to the stock market to believe that share buying is about making risk- free gains. The whole tenor of this privatisation campaign, like its predecessors, suggests there is easy money to be had for anyone who registers an interest.

Far from giving birth to a nation of shareholders, offering incentives has merely created expectations of gains, which private sector companies cannot hope to meet. Share ownership is far more risky than the Government would have us believe.