Australia says Papua New Guinea companies will be able to tender for aid contracts in PNG for the first time.
Foreign Minister Alexander Downer made the announcement today, at a meeting of Ministers from both countries, in Lae.
The decision comes after years of criticism from both the PNG government and NGOs who have called Australian aid "boomerang aid" meaning mostly it goes back to Australia.
Mr Downer says the change shows Australia's commitment to increased PNG participation in the delivery of the Australian aid program.
Meanwhile Australia has opened a major water supply system in Lae.
The project, which has been under construction for three years, cost nearly 13 million US dollars.