Professor Garnaut, who Chaired the fund until October, was forced to resign his last official role in PNG last week - as Chairman of Ok Tedi Mining Limited - because of a travel ban imposed by Mr O'Neill as a result of the dispute.
Despite that Professor Garnaut says he is an optimist about PNG, a place he says Australia and Australians should work harder to understand.
Presenter: Jemima Garrett
Speaker: Professor Ross Garnaut, former Chairman of PNG's biggest mining company, Ok Tedi Mining Limited, and the PNG Sustainable Development Program
GARRETT: Professor Garnaut has a lifetime of experience in PNG starting prior to independence in 1975 when he helped the country's new leaders develop their first economic policy.
For a decade he served as Chair of the PNG Sustainable Development Program - a charitable fund set up to take over BHP's shares in Ok Tedi Mining Limited on behalf of the PNG people when BHP left in disgrace having caused for a devastating environmental damage down stream from the Ok Tedi mine.
That fund is now worth $1.4 billion and it puts $100 million a year into development projects across the country.
PNG's Prime Minister Peter O'Neill says 10 years down the track BHP Billiton should get over its colonial mentality and relinquish control.
But Professor Garnaut says the fund is a rare example of good governance, one that is showing how the huge wealth coming from PNG's resources boom could be managed.
GARNAUT:If there is ever to be a successful sovereign wealth fund in PNG it will need to be governed as well as PNGSDP's long term fund. It is a model of good governance. It is unlike the public enterprises in PNG with their poor record on audit, on transparency, on accounting for monies within their responsibility.
GARRETT: If PNG is to take full control of the Development Fund, Prime Minister O'Neill must renegotiate the original agreement with BHP - but BHP Billiton is not willing to talk.
Professor Garnaut says with former Prime Minister, Sir Mekere Morauta, as its new Chairman, the Fund is PNG controlled and, he says, there are good reasons why its management structure should not be changed.
GARNAUT: If the current arrangements continue to work, and that is what we all hope, and that is what will be best for Papua New Guinea, then Papua New Guinea will have something that lots of poor developing countries don't have and that is some pluralism in the development effort; a development agency that is not part of the system of government that can introduce some variation in the way things are doing.
GARRETT: Papua New Guinea is the tiger economy of the Pacific. It has strong and growing trade links with Asia and its population is rapidly expanding.
Professor Garnaut says many Australians do not realise how crucial it is.
GARNAUT: A successful PNG is a very important partner for Australians of future generations. An unsuccessful PNG is an immense problem on our doorstep. Just imagine the problem that the Caribbean and Central America has been for the United States, from time to time. When you have instability and problems on your doorstep ... well Papua New Guinea, proportionately, is many, many times larger than those Caribbean and Central American countries to America. But I'd emphasise the positive gains that Australia would get from having a successful, vibrant prosperous democracy on its doorstep and there are prospects for that.
GARRETT: Professor Garnaut says PNG has a huge opportunity in the next decade to lift itself out of poverty and to tackle problems, such as corruption ..and Australia and Australians can help.
PNG, he says, is fortunate to have a strong civil society.
GARNAUT: There are always people ready to stand up for good governance, to make self-sacrificing contributions to the development of institutions, to constrain corruption. What helps Papua New Guinea, from foreigners is for foreigners to take a deep interest in all of that, to recognise the nuances, to recognise that things are never all good or all bad and to know enough about Papua New Guinea, to understand enough about Papua New Guinea, to discriminate in their comments. What has tended to happen is that relatively few Australians have put the effort in to understand all of those nuances. A blanket indiscriminating condemnation of Papua New Guinea undervalues and demoralises those who are working in selfless ways for the public interest and provides cover for those who are not.
For an extended interview with Professor Ross Garnaut click here