The O'Neill government and China's Exim bank are currently working out the details of the massive loan, first announced two months ago.
Mr O'Neill says the money will be used to upgrade the Highlands Highway, a decrepit road running through the heart of the nation, as well as improvements to the nation's airports.
"Our infrastructure in the country is declining to a state where some infrastructures are not able to cope with the demands of our people and our economy," Mr O'Neill told Radio Australia.
"So when you look at this, what solutions do you have? We need to program a massive overhauling and redevelopment of many of these infrastructures, particularly the transport systems in the country, and we are doing that by borrowing large sums of money."
The opposition has criticised the deal, saying a $A233.7 million deficit in the 2012 budget means loan repayments will be a huge burden on the country.
Mr O'Neill said he expected the economy to continue to grow at an average eight per cent over the next year, while estimates suggest that figure will double in 2014 when liquefied natural gas projects are expected to come online.
"(The loan) sounds large but the drawdown will not be in one single year," he said.
"We are managing it prudently through our fiscal strategies that we have put in place and the projects are not going to be completed in one single cycle of a budget.
"So I don't think the stress levels will be that noticeable as the economy continues to grow."
Australia currently gives $A491.7 million in aid to PNG.