JPMorgan has won arguably the most important and sensitive financial advisory mandate to emerge from Malaysia over the past decade. The bank is believed to have spent the past five weeks conducting due diligence on the UEM (United Engineers Berhad) group following the company's de-listing from the Kuala Lumpur Stock Exchange this October. However, while a bank official confirms the appointment, he declined to provide further information.

Sorting out UEM and its still listed parent Renong Berhad is viewed as a crucial first step in overhauling corporate Malaysia in order to revitalise foreign investor sentiment, stimulate economic growth and improve sovereign credit ratings, which appear to have become stuck at BBB/Baa2. The problems of the two intertwined groups, which account for 5% of Malaysian banking assets and control 13 listed entities with a market capitalization of M$20 billion ($5.3 billion), remain the highest-profile symbol of a deeply ingrained malaise in the corporate sector.

The racial New Economic Policy, which sought to shift control of the economy from the ethnic Chinese to the indigenous Bumiputra - "sons of the soil" - is argued by critics to have led to rampant crony capitalism among a small clique of businessmen close to the ruling UMNO party. Where UEM and Renong are concerned, the former's depletion of its cash pile to purchase of the latter's stock in 1997 and bail it out of crisis is widely viewed as one of the corporate governance low points of the Asian financial crisis.

Observers will therefore be watching closely to determine how wide-ranging the government envisages corporate restructuring. Key issues will be whether there is a "Malaysian solution," similar to the restructuring of the banking sector; whether the government can achieve a balance between foreign ownership and national interest and more importantly; whether the economy will to be run along market lines, separating politics from business and awarding contracts on the basis of competitive bidding rather than simply awarding them to politically well-connected Bumi entrepreneurs.

As Standard & Poor's sovereign analyst Takahira Ogawa puts it, "Corporate restructuring is necessary to improve the confidence of global investors as well as the country's medium to long term growth prospects. What's difficult for the Malaysian government is the fact that the Bumiputra policy stands at the core of its economic policy. If a company is viewed as being strategically important to the country, will the government want to give up majority ownership to a foreign entity? At the moment, it's not clear what the government defines as strategically important and how it intends to deal with foreign ownership."

He further adds, "It's clear that the government's direction has changed, but to what extent it isn't possible to say. It's still too early. On the other hand, if we become convinced mid-way through the restructuring process, that the direction really has changed, then we might change our opinion on the country's rating."

The man behind this new direction is Prime Minister Mathahir Mohamed's special financial advisor, Nor Mohamad, who began to assert greater control after former Finance Minister Tun Daim officially stepped down on June 1. Malaysian experts say that the pro-business advisor has his sights set on all the well-connected Malay businessmen who have dominated the economy. A sea change in sentiment has occurred since the Asian crisis, and most recently the deal to buy Tajudin Ramli's stake in airline, MAS shocked almost everyone (the government paid him three times the share price for the troubled airline).

Where UEM is concerned, the government is planning to conduct a complete audit of the conglomerate's sprawling business empire and then break it up by selling-down key assets to lower debt. Some assets, such its main cash cow PLUS (the country's North South highway) may be listed. Others will look for a strategic partner.

Already it seems likely that particularly sensitive companies such as Time Telecom will be accorded a Malaysian solution. Previously Singapore Telecom had expressed an interest in purchasing the group's fibre optic network, but after becoming a political hot potato, the plan was dropped and the company listed Time dotCom on the KLSE this February in an offering that closed only 25% subscribed.

Now it seems that Telekom Malaysia may buy Time. Observers believe the two would make a good fit since the majority state-owned telecom's group cellular operations are not perceived to very strong. Its former CFO Abdul Wahid Omar also became managing director of UEM in October, after the departure of Halim Saad, the man behind the controversial share swap of 1997 and a close associate of Daim.

Other entities, which are said to be up for sale, are Commerce Asset-Holding Berhad, the country's second largest lender and Cement Industries Malaysia Berhad.

In September, the government spent M$3.7 billion ($1 billion) to take UEM private and Renong's share price has risen nearly 30% over the last week as investors gamble that it will soon follow suit. The government's action followed Halim Saad's failure to honour a put option to buy back 31% of Renong from UEM for M$3.2 billion. The option had originally been structured to restore confidence after the share swap debacle.

Between them, Renong and UEM are estimated to have run up M$20 billion ($5.3 billion) in debt.