One of Australia’s largest engineering companies is abruptly pulling out of Burma after an investigation by Asia Sentinel revealed that a subsidiary was working on the construction of a lavish new airport for the repressive junta in Naypyidaw, the generals’ reclusive capital.

Downer EDI’s Singaporean consultancy arm, CPG Corporation, was contracted to design the revamped airport at Naypyidaw, working alongside Asia World, the shady Burmese conglomerate whose management are targeted by sanctions in Australia, the US and Europe.

The revelation that it has been doing business in Burma is highly embarrassing for a company that has donated thousands of dollars to Australia’s ruling Labor Party and has won billions of dollars in Australian government contracts. Prime Minister and Labor leader Kevin Rudd has been vociferous in his condemnation of the Burmese regime and last year his government ratcheted up sanctions against the generals and their cronies.

The Sydney-based Downer claimed that it had been unaware that its wholly-owned subsidiary was working on the Naypyidaw project until it was contacted by Asia Sentinel last week. The Australian parent company also said it had been unaware of CPG’s involvement as a design consultant for the upgrading of the international airport in Rangoon in 2003.

“As soon as this matter was brought to the attention of the chief executive, enquiries were made immediately and a decision followed to withdraw from the contract in an appropriate manner,” said Maryanne Graham, a spokeswoman for Downer.

The company admitted that its “zero harm” policy had “not been applied at a sub-divisional level” and said that it was launching a “rigorous” review of all its contracts and beefing up its governance procedures to ensure better oversight of future operations.

In 2005, the Burmese military government suddenly announced that it was moving its administrative capital from Rangoon to a new site near the town of Pyinmana in the heart of a malaria-infested jungle in central Burma. The government, which calls itself the State Peace and Development Council, claimed that Rangoon had become overcrowded but most observers believe the move to Naypyidaw was the result of superstition and a paranoid desire to build a city that was better protected from both internal and external ‘enemies’.

Human rights groups claim that much of Naypyidaw, where the generals hide away in luxuriant palaces, was constructed using forced labour, including children, and that many local residents had their land seized without adequate compensation. Such gross human rights abuses are common practice in large development projects in Burma, which usually directly benefit the regime and its cronies while doing little to alleviate the extreme poverty and hardship faced by many Burmese people.

Downer, which is a constituent of Australia’s benchmark ASX 200 share index and has a market capitalization of around A$1.7bn (US$1.3bn), is actively involved in a variety of infrastructure, rail and mining projects in Australia, New Zealand and the wider Asia Pacific region.

A report in the New Light of Myanmar, the mouthpiece of the military junta, dated 25 April claimed that the expansion of Naypyidaw airport was intended to increase international travel to the city, even though most foreigners are banned from visiting except on official visits.

The insecure generals, who regularly talk up the threat of internal and external enemies, have been careful to ensure that most of the country’s civilian airports can be easily adapted to military use at short notice. The New Light of Myanmar noted rather ominously that the new runway at Naypyidaw airport will be big enough to ensure that “10 aircrafts can land simultaneously” – an exercise not commonly undertaken by passenger airliners.

The newspaper added that while CPG had produced the designs for the airport, the construction work was being carried out by Asia World, the Burmese conglomerate owned and run by two of the junta’s key henchmen Steven Law (Tun Myint Naing) and his father, Lo Hsing Han.

Last year, the US Treasury implemented economic sanctions against both men as well as Law’s wife, Cecilia Ng, and the string of companies they control in Burma and Singapore.

In a statement released in February 2008, the Treasury noted that both men had a history of involvement in the illegal drugs trade. “Lo Hsing Han, known as the ‘Godfather of Heroin’, has been one of the world’s key heroin traffickers dating back to the early 1970s,” the Treasury claimed. “Steven Law joined his father’s drug empire in the 1990s and has since become one of the wealthiest individuals in Burma.”

While Canberra does not have any financial sanctions against Burmese companies, both Law and his father are the subject of individual sanctions in Australia. That means that any transactions involving “the transfer of funds or payments to, by the order of, or on behalf of” Law and his father are prohibited without prior approval from the Reserve Bank of Australia.

Graham confirmed that CPG was “contracted by a Singapore-based entity to undertake a design assignment for the Naypyidaw Airport”. She added that while CPG was not doing business directly with Asia World, Downer believed that “the Singapore-based entity may be a subsidiary of Asia World”.

“We take zero harm very seriously and while not insinuating anything against our direct client in Singapore, we are taking action to withdraw from this assignment in an appropriate manner,” Graham said. “We are also working to ensure that we meet all of our reporting obligations to the relevant authorities in light of this unintentional oversight.”

CPG started life as the Singapore government’s public works department before it was corporatized and eventually sold off by sovereign wealth fund Temasek to Downer for S$131m (US$90) in 2003. While many Australian companies refuse to do business in Burma, there are fewer qualms in Singapore, which is one of the biggest investors in its Southeast Asian neighbour.

But although CPG has been active in the country for some time, it was initially reluctant to talk about its Burmese operations, with a Singapore-based spokeswoman telling Asia Sentinel that “we cannot discuss any details of this project due to client confidentiality”. However, alarm bells went off in Downer’s Sydney headquarters when the company was contacted by Asia Sentinel and the chief executive, Geoff Knox, was forced to act quickly to prevent further reputational damage.

Questions still remain about how a large publicly-listed company such as Downer could have allowed a subsidiary to operate with such a free hand and how its audit and governance procedures failed to pick up on the fact that CPG had consistently been doing business in such a controversial location.

Downer has faced a series of mounting problems in recent years, including a string of profit warnings and contractual disputes. But a new management team was appointed last year and it has only recently completed a lengthy restructuring process.

Downer is likely to face some sort of financial penalty as it seeks to withdraw from the Naypyidaw airport contract but Graham said that the company’s main focus was on its “strong value-based system”. “Any financial ramifications aren’t our greatest concern,” she explained, adding that, as a publicly-listed company, Downer would update the market if there was any material impact to its financial position.