The Australian government has been warned a $38 million medical aid project in Papua New Guinea could be used to foist deadly counterfeit drugs onto some of PNG's poorest villagers.

Department of Foreign Affairs and Trade bureaucrats in Canberra are refusing to say if Australia will continue to bankroll the distribution network despite warnings from the PNG medical community of corruption allegations surrounding the project.

Borneo Pacific Pharmaceuticals has won the $28 million contract to supply medical kits to the PNG government with Australian aid, then send the drugs to aid posts and medical centres around the country.

Internal DFAT documents identify Borneo Pacific as PNG's largest provider of drugs from manufacturer North China Pharmaceutical Group, a known offender in China's fake drugs crisis.

PNG's medical society alleges that Borneo Pacific ''is renowned for giving presents to people in the government procurement system'', has branded the process ''corrupt'' and warns that counterfeit medicines supplied under the deal could kill.

The revelations come despite promises to clean up the PNG Health Department's drug supply division, described in 2011 by its own minister as ''riddled with corruption''.

The internal DFAT documents show officials knew Borneo Pacific did not hold the required quality standards accreditation to compete in the tender, and were worried when the requirement was simply removed by PNG's Secretary of Health after the tender's deadline.

The same document shows the non-profit IDA group, which does hold the required accreditations, offered to supply its high-quality kits for $8 million less than Borneo Pacific's bid.

An internal DFAT review of the health kits program by the Burnet Institute tells of the IDA drugs supplied by Australian aid being saved for the most desperately ill villagers by doctors and nurses who distrust the locally supplied drugs. The draft Burnet report warns of a ''serious problem'' of ''transparency and accountability'' at national level in drugs supply and procurement.

The distribution scheme, part of Australia's $38 million PNG Health and HIV Procurement Program, has been lauded as a success in its first three years.

But AusAID, before its takeover by DFAT, warned it would walk away if unhappy with the governance surrounding the program's next round.

In Canberra this week, officials from DFAT were trying to enforce an information blackout on the fate of the project. ''Detailed information on the priorities of the aid program - including arrangements for funding the distribution of medical supplies - will be provided by the government in due course,'' a spokeswoman said.

But Nakapi Tefuarani, of the Medical Society of PNG, was more blunt about the program's future. ''It seems that this year the process will be corrupt once again,'' Professor Tefuarani said.

He warned of the dangers of Australia's aid agency walking away from the distribution network, and called on PNG Prime Minister Peter O'Neill to reverse the award of the tender.

''We will be left with local 'wantok' distribution companies sending out low-quality and possibly counterfeit medicines to our hospitals and health centres,'' Professor Tefuarani said.

In response to accusations in the PNG Parliament this month that the medical kits deal with Borneo Pacific bypassed by the nation's Central Supply and Tenders Board, Mr O'Neill defended the process.

Local media reported the Prime Minister as saying the deal had gone through ''a rather rigorous approval process'' in which it was sighted and approved by the pharmaceutical and medical boards, the Department of Health and the National Executive Council.