Paladin controversy prompts renewed scrutiny of $591m Nauru deal

Controversy surrounding the awarding of a $423m Manus Island contract to the security contractor Paladin has prompted new scrutiny of a second major $591m deal to run the Nauru detention centre.

The home affairs department used a limited tender process with only one bidder to pick relatively obscure companies in both major contracts.

Canstruct International, a Brisbane-based firm and Liberal donor, reportedly had limited experience running garrison and welfare services when it bid for a lucrative government contract to run the Nauru detention centre in 2017. Its previous work was almost all civil construction and infrastructure projects, though it had worked on projects on Nauru, including to rebuild the detention centre following riots in 2013.

The government struggled to find anyone who wanted the Nauru contract, and awarded the deal to Canstruct in a limited tender with no other bidders. Canstruct was awarded $8m initially through a letter of intent.

The process has raised comparisons with the Paladin case, which continued to pile pressure on the government this week. On Monday, Mike Pezzullo, the head of the department of home affairs, told a Senate estimates committee that the department was “dealing with an urgent situation” in awarding the contract to provide services on Manus Island “but we were never desperate”.

The director of legal advocacy at the Human Rights Legal Centre, Keren Adams, said the Canstruct and Paladin cases raised serious questions about the department’s handling of the offshore detention contracts.

“Canstruct, like Paladin, had next to no relevant experience when they were awarded the Nauru contract,” Adams told Guardian Australia. “One day they were building tunnels and the next they were managing welfare services for a group of highly vulnerable and traumatised people.

Adams said that as mainstream companies have increasingly distanced themselves from the “abject cruelty” of offshore detention, the government was having to cast the net wider to find contractors on Nauru and Manus.

The lucrative deal has helped propel Canstruct, based in the Brisbane suburb of Yeerongpilly, into wealth. Its latest filings with the corporate regulator revealed a $43m profit in seven months running the centre. Human rights lawyers believe the company could make $110m profit by the time the contract expires at the end of April.

Canstruct’s contract was initially scheduled to end in October as the Nauru government took over the running of the regional processing centre, but it was extended to April amid multiple reports the Nauru government was not ready.

In August the Nauruan government legislated the creation of a Nauruan RPC corporation in anticipation of the takeover, which has a three-person board appointed by cabinet to procure and manage all services.

At the same time it passed amendments which transferred the power to make agreements with service providers from the secretary of justice and border control to the administrative head of the department of multicultural affairs. The latter role is held by Barina Waqa – daughter of the Nauruan president, Baron Waqa.

In October the Nauruan government legislated for all revenue which came through the RPC corporation – by then known to be the wholly state-owned Eigigu Solutions – to be held separately to treasury funds, and for it to be released on the joint approval of secretary and minister of multicultural affairs.

In November, when Canstruct’s contract was extended for six months, the Nauruan government passed a regulation exempting Eigigu Solutions from “management and service fees for the facilitation and administration of services” which it had previously required Canstruct pay to the government. The bill was $20m for Canstruct’s first 12 months and $10m for its extra six months.

There is no suggestion that Canstruct, a firm with 500 staff and contractors, is not providing proper garrison or welfare services, or that commonwealth procurement rules were breached.

But the use of another limited tender by the Department of Home Affairs for a major contract adds to criticism of the way it is handling contracted work in Australia’s offshore detention centres.

Questioned about the Canstruct contract in Senate estimates in 2017, the head of home affairs, Michael Pezzullo, conceded that “you should always go for an open tender”, unless there were “exigencies”. Other officials explained that the department had previously tested the market and found no one willing to do the work on Nauru, other than Canstruct.

“We’ve made expressions of interest in addition to having gone to tender and there was nobody else in the market that was actually interested in the contract,” Mandy Newton, a home affairs department deputy commissioner, told Senate estimates in 2017. “So we went directly to Canstruct.”

Cheryl-Anne Moy, a senior home affairs executive, told Senate estimates on Monday that it was difficult to find companies willing to work at regional processing centres.

In answering questions about the Paladin contract in the first half of 2017, Moy referred to previous experiences taking expressions of interest to market.

“The number of people that replied to those tenders was limited and primarily the people who decided not to tender – who expressed some interest early in and then decided they wouldn’t tender – gave us the reason there was too much noise for their organisations and international companies around regional processing.”

The Canstruct deal was struck not long after the auditor general had criticised the department for the way it handled its contracts on Nauru and Manus Island, saying it “has fallen well short of effective contract management practice”.

Archived versions of Canstruct’s website immediately before the awarding of the Nauru contract show it referred to itself as a “civil engineering and building company”.

Evidence to Senate estimates suggests Canstruct had previously donated to a Liberal-linked fundraising entity, Forward Business Leadership. The body was an associated entity of the Queensland Liberal National Party. In response to a series of questions, Canstruct included a single-line response clarifying the nature of the donation.

“The donation referred to was made over 10 years ago for a local council campaign,” the company said.

Pezzullo said in 2017 that such donations would not necessarily bar a company from the tender under the commonwealth procurement guidelines.

“I’m not sure that there’s any prohibition per se,” he told estimates. “Most of these matters are always managed at arms-length from ministers. This sort of contract –even though it’s a large sum of money, we’re very careful with every single dollar of the taxpayers’ money that we get.”