Jan Cienski in Warsaw -

Poland's outgoing Law and Justice government has left its successors in the Civic Platform party a dangerous and possibly enormously costly landmine in the form of an ongoing dispute with Eureko, the Dutch insurance company, over the botched privatisation of PZU, the Polish state-owned insurer.

A week after the October 21 parliamentary elections that were won by Civic Platform and ahead of the handover of power, the Polish Treasury unilaterally decided to abrogate a 1999 privatisation agreement that was supposed to hand control of PZU over to the Dutch.

Eureko controls one-third of PZU, but the attempted sale of Central Europe's largest insurer has long been very controversial. Politicians claim one of Poland's crown jewels was sold too quickly and too cheaply to a little-known Dutch company. A long series of Treasury ministers have tried without success to crab-walk away from the deal.

Fuelling the government's desire to retain control is PZU's enormous profitability. On November 19, PZU said profits for the first 9 months of the year rose 25% from a year earlier to €912.7m, boosted by a 45% rise in profits at its PZU Zycie life insurance unit. In addition, PZU said its Lithuanian and Ukrainian subsidiaries swung to a small profit in the first three quarters after posting a €10.6m combined loss in the corresponding 2006 period. As such, PZU's chief executive, Agata Rowinska, said this year's profit would be ploughed into further regional expansion. 'I will not hide that results from our foreign companies urge us to go for more investments," Rowinska told a news conference.

Dutch courage

The Dutch are holding firm, demanding that an agreement to sell them a majority stake in the company after a stock market floatation is carried out. Eureko has taken the Polish government to an international tribunal, claiming Warsaw violated a Polish-Dutch investment protection treaty. Eureko wants the shares to be sold to it at the 1999 price, a considerable discount over today's price, and company officials talked more than a year ago of seeking an additional PLN6bn-9bn (€1.6bn-2.4bn) in compensation.

Poland has lost a series of court decisions in the case, most recently at the end of October when a Belgian court ruled that Polish claims that one of the arbitration judges was biased were unfounded.

The Polish government is now claiming that Eureko was improperly pursuing its claim outside of Polish courts, and when the Dutch company failed to comply with demands to abandon those arbitration proceedings, the Polish Treasury said it was unilaterally pulling out of the privatisation agreement. Some government officials even claim that means Eureko has lost ownership of its 33% of PZU.

"This isn't a symbolic step," Pawel Szalamacha, the departing treasury deputy minister, said in a newspaper interview, adding, "I'm the deputy minister in the government of Poland, not a Dutch colony."

Most legal experts feel that the government's step has no legal force, and cannot deprive Eureko of its shares or force it to drop its arbitration claim. Eureko insists that it will keep on fighting, pointing out that the arbitration tribunal is now preparing to begin hearings on setting the level of damages. "There are no legal or factual grounds for the ministry to rescind the PZU SA Privatisation Agreement concluded between the State Treasury Ministry and Eureko in November 1999," the company said in a statement.

In a further souring of relations, the Treasury is refusing to obey another recent court ruling that it apologize for earlier accusing Eureko of using underhanded PR techniques to argue its case. Earlier this year, Eureko's representatives stormed off PZU's board of directors, saying the Treasury had made it impossible for them to co-manage the company.

The poisoned cup is now being handed over to Aleksander Grad, the new Treasury minister who takes over from the combative and controversial Wojciech Jasinski. Civic Platform has said it plans to sell almost all the 1,200 companies remaining in state hands, and finding a solution to the standoff with Eureko before an unfavourable arbitration ruling blows a hole in the budget, is crucial.

"This matter demands careful thought by the government," says Grad. "We're going to look for a solution to this crisis. I'm an advocate of negotiating with Eureko, but it's a bit too soon to talk of specifics."

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