Transparency International Vanuatu says upgrading Port Vila's Stade prison would be a complete waste of time.
The comment follows the New Zealand foreign affairs minister's confirmation that his government has withdrawn its offer to build a new prison on land outside of the capital.
Murray McCully says New Zealand can no longer roll over the funding for a new facility and is only prepared to pay for a fairly significant rebuild of the Stade prison.
But Transparency's executive director, Marie Noelle Ferrieux Patterson says that prison is too small and unsafe.
"With the fact that it's cement on the top and the cracks and all that following different earthquakes that basically that prisn will need to be destroyed and rebuilt. So if you are going to rebuild something of that importance, I still think the New Zealand government should, if they are going to build something, they should build it in a rural area not too far away from town."
Marie Noelle Ferrieux Patterson says a new prison on a new site would also make better security arrangements possible.
This week 12 week inmates escaped from Port Vila's high-risk prison, the latest in a series of breakouts over the past couple of years.