PNG Prime Minister James Marape wants more local firms to provide services on Manus Island.
"We don't intend for foreign contractors to operate here in business like security — it is a business that local companies can be engaged in and I ask the Australian government to stop this contract forthwith,"Mr Marape said.
He said he would summon the head of the Australian mission to PNG to"provide an explanation".
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Paladin's contract is up for renewal at the end of June.
Mr Marape's comments come after Home Affairs Minister Peter Dutton told the ABC earlier this month that the"likely arrangement is that there will be a continuation"of Paladin's contract.
"The department will work with the PNG authorities. We've got to make sure we're getting value for money,"Mr Dutton said.
Paladin's $423 million for services on Manus Island has been under scrutinysince it was revealed the company was given just six days to bid for a $90 million dollar tranche of the contracts it eventually won.