The Asian Development Bank, Vanuatu and the Australian Government are working to improve access to sanitation, drainage facilities and roads in Vanuatu.
It is part of a plan to achieve sustainable urban development.
Port Vila is the country's commercial hub, generating almost two thirds of national Gross Domestic Product.
The ADB says the current poor state of the city's drainage, road and sanitation infrastructure is undermining Vanuatu's ability to attract and retain commercial and tourism related investment.
It says the deteriorating condition of the critical infrastructure is also leading to increasing public health concerns, environmental degradation and poorer quality of life for Port Vila residents and visitors.
The ADB will provide a loan of five million US dollars, with Vanuatu contributing just over 3 million and a significant Australian contribution.