A losing proposition

   Anyone thinking of buying life insurance in Poland last week probably had second thoughts after the farce surrounding the country's leading insurer, Powszechny Zaklad Ubezpieczen (PZU). The same could also be said of foreign companies looking for potential investments.

   As the wrangling over PZU's privatization issue descended into a legal morass, observers shook their heads in disbelief as Poland seemed to take several jumps backward on its otherwise forward path of progress. Surrounding the controversy is a Byzantine web of confusion laced with intrigue and alleged deceit. The stuff of movies, no less – who said insurance couldn't be interesting?

   The crux of the matter is that Treasury Minister Andrzej Chronowski put an end to months of backroom argument by replacing PZU's management. This followed a request to the courts early last week to annul last year's sale of a 30% stake in the insurer to a consortium of Netherlands-owned Eureko and BIG Bank Gdanski (BIG BG).

   To justify its actions, the treasury claims the consortium broke the terms of PZU's 1999 privatization agreement by having an ulterior motive for acquiring the insurance giant. This motive was alleged to have been to protect BIG BG, in which PZU holds a stake, from a hostile takeover.

   The consortium claims this is nonsense and last Thursday said it was ready to file several lawsuits against the treasury. That's the story in a nutshell.

   But the consequences for the government and, indeed, Poland could be much more far reaching. The already weak Solidarity Election Action (AWS)-led government now looks even more fragile as its treasury minister battens down the hatches and prepares for war. There have already been calls for early elections and the issue is likely to figure large in the run-up to the polls. Also, if the court votes in favor of the state, the treasury will have to repay the consortium the $650 million it paid plus interest. Not good news for budgetary inflows, especially with all the recent controversy surrounding the UMTS tenders.

   Meanwhile, foreign investors in the European Union and beyond have started to shift uncomfortably in their seats as Poland appears to drive a stake through the heart of its privatization plans. The country relies heavily on foreign direct investment. Next year, the government estimates it will earn about $4 billion through privatization ventures. Attempts to undo existing contracts do not go down well with companies currently signing off on deals.

   The affair has also caused a few raised eyebrows in Brussels. Poland claims to be working hard to join the EU in 2003. Anything that stains Poland's reputation as a serious political or economic partner could have dire consequences for the country's bid to join the club. Right or wrong, Chronowski's actions have without a doubt opened up a can of worms that will be hard to force back into the tin.