Early last week, at the height of the controversy over Australia's plan to permanently export its asylum seeker problem to Papua New Guinea and neighbouring Nauru, PNG Prime Minister Peter O'Neill decided to tackle some of his fiercest domestic critics head on.

He rounded up a clutch of senior ministers and headed out to the campus of the University of PNG in Port Moresby where he faced a crowd of more than 500 students, many angrily opposed to a decision they believe has compromised the country's independence and trampled its reputation.

For more than an hour O'Neill fielded every question the spirited crowd threw at him. Many in the audience were surprised not just by his willingness to take on the widespread anxiety about his decision but also by the vehemence of his defence of the country's relationship with Australia.

''We have no closer friend than Australia,'' he said, listing the many ways PNG had been supported since independence in 1975 beyond the billions of aid dollars. ''When there is a natural disaster, Australia turns up to help before we even ask them,'' he said. He praised Australia's vital support for the financing of a new $19 billion LNG project that will start exporting next year: ''If it wasn't for Australia, it wouldn't have happened.''

Just as Australia had been a reliable friend to PNG in times of need, O'Neill declared, so in the ''Melanesian way'', PNG was obliged to help when Australia had problems of its own: ''Now they have come to us with a problem, we have to help.''

While wrapping in altruism and obligation a decision that potentially could see PNG swamped with tens of thousands of asylum seekers, O'Neill's move is also a shrewdly self-interested calculation by a leader who is transforming the dynamics of PNG politics and rapidly emerging as a new force in regional affairs.

In throwing a political lifeline to Prime Minister Kevin Rudd, O'Neill has sent a clear message that the nature of the relationship between Australia and PNG is changing fundamentally: the former colony has grown up and help is no longer a one-way street. And implicit in that is the declaration that PNG must in future be treated as a partner, not a supplicant.

''This is a country that has stood by Australia in difficult times and we will continue to stand and work together with Australia in the years to come,'' O'Neill said in an exclusive interview with Fairfax Media this week. ''We are members of this region, we need to deal with each other in a positive way.''

O'Neill has also gambled that the asylum seeker deal will deliver a massive dividend for his ambitious development agenda at minimal cost. On top of the $507 million annual aid budget, Australia has now pledged to contribute up to $300 million to rebuilding the Lae hospital and PNG's universities as well as funding scoping studies for upgrading the highway between Lae and Madang and building new law courts in Port Moresby.

Australian officials have confirmed that those extra aid commitments are set in stone. Whoever wins the election, Australia is bound to deliver and the money will still flow even if the boats are stopped and PNG ends up not having to resettle any refugees. O'Neill is also believed to be punting on the prospect that if the new policy fails to deter the boats, then Australia will abandon the very costly processing exercise, still leaving PNG with its aid windfall.

If not, O'Neill faces a potentially huge domestic political problem but one he is well positioned to handle. ''This is typical O'Neill but he is willing to take the risk because he is in a very powerful position. He has got just about everyone in his pocket now,'' says Alex Rheeney, editor-in-chief of the Post-Courier, PNG's most influential newspaper.

O'Neill last week marked the first anniversary of a decisive election victory that ended months of turmoil in which his intrigues to wrest the prime ministership from PNG's founding father, Sir Michael Somare, split the military, the judiciary and the bureaucracy and threatened to trigger a coup.

A year on, O'Neill leads a coalition of 101 MPs in the 111-seat national parliament and has used his overwhelming numbers to push through a series of constitutional amendments that virtually eliminate the risk of him being toppled by a parliamentary vote of no confidence - the bane of every leader since independence.

The grace period under which a new government is immune from challenge has been extended from 18 to 30 months and a government cannot be challenged within the final year of its five-year term. In addition, a notice of motion for a confidence vote is being changed to require the support of 20 instead of 10 MPs and the notice period is being extended from one week to one month. O'Neill denies the changes are anti-democratic and designed to entrench his power.

''This doesn't stop a government being held accountable for its actions. Votes of no confidence have not been removed from the constitution, but the process has been streamlined to make it more accountable. Rather than having one or two individuals running around trying to create instability they must have decent support in parliament and there must be decent timing … and it's not just change because one day someone wakes up on the wrong side of the bed and thinks that they can be prime minister.''

But Paul Barker, head of PNG's Institute of National Affairs, says the changes end any real prospect of the O'Neill government being toppled before the next elections in 2017. ''It means that if you are the government and you have all the resources you can kill off any challenge. A lot of people are very concerned at the way he is entrenching his position,'' he says.

Those concerns have been magnified with news this week of another planned amendment that would reduce the minimum number of days parliament must sit each year from 63 to 40 - thereby reducing the scrutiny of government.

At the same time, O'Neill has succeeded in drawing once powerful political rivals into his orbit. Last month more than 20,000 people gathered in Mount Hagen in the PNG highlands to inaugurate construction of a provincial administrative centre. It turned into an event of far more profound significance.

Western Highlands provincial governor and former prime minister Paias Wingti had invited O'Neill and three other former prime ministers to attend. In a show of regional and factional bipartisanship unprecedented in PNG history, Wingti, Sir Michael Somare, Sir Julius Chan and Sir Rabbie Namaliu joined in publicly endorsing O'Neill's leadership.

''We need to unite behind this government,'' Wingti said this week. ''There has been too much instability in the past. It's time for us all to work together to build the country's future.''

Says Alex Rheeney: ''The old men have conceded that O'Neill has got them by the balls. It sent a powerful message around the country - and to any potential younger challengers in his coalition and in the opposition - that O'Neill has got all the old leaders behind him and he is now the man.''

O'Neill has also embraced the asylum seeker deal as an opportunity to build his ambitions as a regional statesman. It was his proposal to make Manus Island the centre of a regional processing centre, not merely a temporary staging post for people diverted from Australia.

In the past year O'Neill has also sought to broker a return to democracy in Fiji and has extended aid to the Solomon Islands. Last month he led a 200-member government and trade delegation to Indonesia that produced a raft of new bilateral agreements and some frank discussions about human rights conditions in West Papua.

''We need to establish stronger relationships with many of the countries in the region. We are strategically located between Asia and the Pacific and we are, after Australia, the next biggest country in the region. We have a steadily growing economy and we have resources that are still untapped.''

While he can't have been surprised that a strategy to deter asylum seekers would depict PNG as an unappealing destination, O'Neill is upset by the extent to which the country has been smeared as a ''hell hole'' in the debate in Australia.

''Of course, this is an unfair representation of our country. We are a vibrant democracy. We have challenges in all the issues developing countries face but some of the comments from the Australian public and the media are quite wrong,'' he says.

''It is alarming and concerning particularly to see commentators who have no knowledge about the country, who have never been in PNG, but are all of a sudden experts about PNG. We are disappointed with that. This is an Australian issue. We can easily walk away from it and allow Australia to deal with it.''

He is also upset by the extent to which reports about crime tend to dominate media coverage of PNG in Australia. ''If you have an incident in PNG it becomes a front-page story. If the incident happens in Cabramatta, it's on the fifth or sixth page. We are not saying don't report them, but it should not be portrayed as though it is happening right throughout the country.''

Despite the negative portrayal of PNG in connection with the asylum seeker deal, O'Neill believes the overall media attention is helping raise PNG's profile. ''I think a good majority of Australians didn't even know where PNG was before this. So even though this publicity has been somewhat difficult for us I think it has also given good information to Australia and the Australian public that PNG is just next door.''

He denies that cutting a deal with Kevin Rudd on the eve of the election was playing political favourites. ''We have done deals with the Coalition. We have done deals with Labor governments. We are doing deals with the Australian government. It is none of our business who is in charge of the Australian government. We will deal with Abbott on the same issue if he does become prime minister.''

Rudd is a popular figure in PNG. Many people remember it was the first country he visited after becoming prime minister in 2007. Before the media conference during his recent visit to Port Moresby, Rudd sought coaching in pidgin. He wanted to say he loved the country, but when told there was no word in pidgin for love, he said instead: ''PNG istap insait long lewa bilong mi'' [PNG is in my heart]. One local official who was there said: ''The room exploded with applause.''

Senior PNG officials note that despite repeated invitations, Opposition Leader Tony Abbott has never made an official visit to the country although shadow foreign minister Julie Bishop has been several times.

O'Neill says he wants to work with whoever is in power in Australia to deliver on his ambitious development agenda and reverse years of mismanagement of the PNG economy, now growing at about 5.5 per cent.

''At the end of our term we believe we will have an education system that is capturing every child, a health system that is available to every citizen, new infrastructure serving the economy and a much safer PNG. We have a good chance of success because of our political stability and the reforms we are implementing. The only way we can miss this opportunity is by us continuing to encourage instability and we are starting to overcome that.''

With his political rivals in check and his coffers bulging with fresh Australian aid money, Peter O'Neill is perhaps better placed than any PNG leader since independence to deliver.