Papua New Guinea will not renew a contract with an Australian company providing security at Pacific refugee camps, a senior minister told AFP, in another setback for the deeply controversial policy.

Singapore-registered Paladin Holdings has weeks of a contract left to run, but Immigration Minister Petrus Thomas said the new government in Port Moresby planned to terminate it "by end of this month".

Paladin provides security and other services at three "transition centres" for refugees being held on Papua New Guinea's remote Manus Island after trying to get to Australia.

But Australia's Auditor-General is currently investigating how the company -- which had little experience, was thinly capitalised and had ties to a senior Papua New Guinea politician -- managed to win a contract worth more than Aus$420 million (US$289 million).

Thomas said his government had notified Australia's home affairs department that it will launch a "transparent tender process" that focuses on local firms' participation.

Local companies "now have the capacity and expertise to do the job and should be given the opportunity to participate", Thomas said.

Well-connected Manus businessman Sam Tasion has already indicated his interest, saying in a recent statement that "we cannot pass the buck in telling Australia to remove refugees in Papua New Guinea".

Despite the seemingly imminent end of Paladin's contract, Australia's Home Affairs Minister Peter Dutton -- who has tethered his political persona to the offshore detention policy -- said Sunday he expected Paladin's contract to be renewed.

Canberra has turned back thousands of refugees arriving by sea, instead putting them in offshore camps where mental illness and suicide attempts are rife.

The policy has cost Australia billions of dollars and earned it international opprobrium, but remains a vote winner at home.

"The likelihood is there's a continuation. I'm not going to comment when the department is in the process of the arrangements," Dutton told the Australian Broadcasting Corporation.

Several hundred refugees from Manus and Nauru have been resettled in the US, but the process has been slow, leaving some refugees languishing for years on the islands.

Dutton added that more than 300 refugees have been rejected for transfer by the US so far.

Australian opposition leader Anthony Albanese vowed to hold Dutton to account.

"What we're talking about here is taxpayers' money," he said, accusing the government of awarding a substantial contract to "a company based in a shed on Kangaroo Island."