Jan Cienski in Warsaw -

The Polish government is again thinking of ways to avoid handing over PZU, the state-controlled insurance giant, to the Dutch insurance group Eureko, returning to the idea of creating a large nationalized financial group, which it hopes would leave the Dutch frozen out of PZU.

The conservative Law and Justice party government is again broaching the idea of forming a Polish financial champion by merging PZU with PKO BP, a state-controlled bank. Legislation to that effect was being prepared in the Polish parliament, but its implementation was delayed by snap parliamentary elections, which will be held on October 21.

The plan, first reported by the Rzeczpospolita daily, calls for the Treasury, which owns 55% of PZU, to hand its shares over to PKO, which is 51.5% owned by the state. PKO would pay for those shares by issuing bonds, which in turn would be bought by PZU. As part of the final deal, allowance would be made to pay damages to Eureko and PKO would shoulder the obligations the Treasury currently has towards Eureko.

Wojciech Jasinski, the Treasury minister, has said he hopes to see a union of the two companies, but admits, "It will be very difficult to achieve."

Old ideas in vogue

Jaroslaw Kaczynski, Poland's prime minister, has also talked about uniting both companies, an idea that has resurfaced periodically over the last couple of years. The idea was given new impetus by PZU's new CEO, Agata Rowinska, who told reporters that she would work to bring the two groups closer together. Earlier this month she replaced Jaromir Netzel, an ally of Poland's ruling Kaczynski's brothers who was arrested in a high-profile political scandal.

Creating a Polish financial giant able to compete with the foreign firms that otherwise dominate both banking and insurance is attractive politically for a government which has expressed past suspicion of foreign dominance of strategic sectors of the economy. Two years ago the government strongly opposed the merger of two banks owned by Italy's UniCredit Group, and earlier this year the Treasury declared that it intended to keep a "golden share" in selected strategic companies in sectors like energy, finance and telecommunications, which would allow the Treasury to intervene in corporate decisions. The European Commission is examining the issue.

Inevitably, though, the government's plan to merge the two companies is not being looked on favourably by Eureko, which has been engaged in a long-running battle over the botched privatization of PZU.

"We are not giving up our quest to take control of PZU," says Ernst Jansen, Eureko's deputy chairman.

In 1999, Eureko won a tender to take over PZU. It bought one-third of the company and the government promised to allow Eureko to buy an additional 21% of PZU once the company was floated on the stock market. But fearing a nationalist backlash by selling off a large company to a foreign investor, the government backed away from its initial pledge, and subsequent governments have also done their best to ensure that the Dutch group doesn't take over PZU.

Eureko has won two cases before an international arbitration tribunal, claiming that Poland has violated a bilateral Polish-Dutch investment treaty. The Dutch company is seeking as much a PLN9bn (€2.4bn) in compensation, as well as the sale of the 21% stake in PZU to be sold for the 2001 price. A final verdict setting the level of compensation is expected in the coming months.

The Polish government is challenging the tribunal's decision, but its position looks increasingly precarious. While merging the two companies would complicate the legal situation, Eureko is adamant that it will hold the Polish government to its obligations.

Michal Nastula, the head of Eureko Poland, says the eventual compensation faced by the government cannot be shifted to PKO. "This merger cannot happen without our agreement," he says.

Despite the turmoil around the company, PZU is doing well financially. For the first half of this year it reported PLN2.6bn in profits, a 71% increase compared with the same period last year.

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