Prime Minister Anthony Albanese and Vanuatu counterpart Jotham Napat signed the Nakamal Agreement in Canberra on Monday.
The deal was inked almost 10 months after Mr Napat got cold feet and embarrassed the federal government by pulling out of a signing ceremony because of concerns Vanuatu's sovereignty would be undermined.
The half a billion dollars will still be provided to the Pacific nation, but over a longer period of time rather than the originally planned decade.
The new deal states Port Vila will consult Australia on "proposed third-party engagement in Vanuatu's critical infrastructure".
Any critical infrastructure must also remain free from "militarisation, any form of foreign interference or unauthorised access".
The agreement entrenches Australia as the primary policing partner for the Pacific nation.
China is also pursuing a pact with Vanuatu, known as the Namele Agreement.
Mr Albanese said the government wanted a resilient and sovereign region.
"Our agreement reflects and confirms Australia's role as Vanuatu's largest and most comprehensive economic security and development partner, a responsibility that we take seriously," he said.
"This agreement advances a consensus that security is the shared responsibility of the Pacific family ... and encapsulates Vanuatu's sovereign decision not to permit its territory to be used for any foreign military base or infrastructure."
Under the deal, Vanuatu will prioritise Pacific Island Forum members for policing requests.
In the event of a humanitarian disaster, Vanuatu will reach out to Australia, New Zealand or France first before it asks for help from other countries.
Mr Napat said the deal strengthened ties with the Pacific region.
"Today marks a significant step in the Vanuatu-Australia relationship," he said.
"With the signing of the long-awaited Nakamal Agreement, Australia and Vanuatu are close neighbours, trusted partners."
Mr Albanese is expected to travel to Fiji and the Solomon Islands within weeks to progress negotiations on a treaty with Honiara and ink a deal with Suva.
The agreement with Vanuatu comes just a month after Australian agreed to the security and economic deal with Fiji.
The prime minister told parliament the agreement with Vanuatu would help with economic development in the Pacific.
"It will assist on the shared values that we have in tackling climate change, an existential threat to many of the islands in the Pacific," he said.
"There was a common view and consensus across the board about how important this agreement is to securing a more resilient, sovereign, and connected region where we will act together to grow our shared prosperity."
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