At least $80 million had already been spent on the tender process, which was well-advanced and had originally been due to be finalised in October last year.

Under the plan, one of two consortiums would have been chosen to build a new visa processing platform, taking a cut of the cost of each visa application. It was expected to be worth hundreds of millions annually for the winning bidder.

Both Labor and the Greens had strongly opposed the plan, as had the main public sector union. Despite years of planning and an almost-complete tender process, the move looked set to be derailed earlier this year when it was revealed legislative change would be required, and crossbench support looked unlikely.

The project has been dogged by political conflicts of interest, with one of the main tenderers - the Australian Visa Processing consortium - headed by Scott Briggs, a friend of Prime Minister Scott Morrison and former colleague of Immigration Minister David Coleman.

Mr Briggs is also a former NSW Liberal deputy state director, but had resigned from Australian Visa Processing late last month.

Both Mr Coleman and Mr Morrison had said they wouldn't be involved with decision-making over the project, but Labor still argued the government was moving ahead with the scheme to benefit powerful friends.

Australian Visa Processing was set up specifically to bid for the project and included Ellerston Capital, Oracle, PwC, Qantas, NAB and Pacific Blue Capital.

The second consortium was a partner between Accenture and Australia Post.

Both consortiums will find themselves out of pocket to the tune of millions of dollars after the government's reversal.

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Labor's shadow assistant minister for immigration Andrew Giles said the plan was always a "bad idea".

"This is a long overdue but important victory for the national interest, for common sense and for thousands of hardworking public servants who do this vital work," he tweeted.

Under projections laid out in tender documents released last year, the winning bidder looked set to make more than $300 million a year, but with Australia closing the border to non-citizens to slow the spread of COVID-19 such figures would be unlikely.

The Australian government's visa processing software is unwieldy and out of date, and still requires massive investment. Until the recent crisis the system handled more than 9 million applications a year, across a system that involves more than 50 different computer systems, two of which are more than 25 years old.

Acting Immigration Minister Alan Tudge announced late on Friday the government had changed policy and would implement "modern easy to access, digital services for clients in line with its response to the Thodey Review of the Australian Public Service".

The new way forward will be "integrated enterprise-scale workflow processing capability that could be utilised across the Commonwealth".

The final line of the press release confirms the government is terminating its request for tender for the new visa processing system.

The main public sector union called the decision an "enormous win" for its members.

"This was always a friendless plan, universities, migration experts and conservative pundits have all been calling for the government to abandon it. What is extraordinary that it took a global health pandemic for the government to see the flaws of this plan," Community and Public Sector Union national secretary Melissa Donnelly said.

"When our nation is facing great uncertainty, Australians expect the government to back local jobs and the integrity of vital public services, not flog off essential services to political donors' multi-national companies. This is a win for the security and health of the Australian community."