AUSTRALIA must ramp up aid to Bougainville Island or risk the return of local civil unrest that could result in a more costly military response, a think tank says.
Island dwellers will vote on independence from Papua New Guinea in a referendum expected to be held between 2015 and 2020.
But if PNG declined to ratify the result, Bougainville could descend into a conflict like the bloody unrest of 1988-97, the Australian Strategic Policy Institute (ASPI) warns.
Special report authors, ASPI executive director Peter Jennings and analyst Karl Claxton, say Australia has a significant interest in stability in the region to its north.
"If a new generation slides into bloodshed on Bougainville, Canberra couldn't wait a decade for a military stalemate to reappear before intervening," ASPI says.
This could cost as much as operations in East Timor ($4.3 billion) and the Solomons ($350 million).
"Australia should lead a new international assistance effort to avoid the need for another military intervention," ASPI said.
This would include additional aid funding, development and police training and defence assistance.
The new coalition federal government has pledged to cut $4.5 billion from the foreign aid budget over the next four years.
Bougainville, with a population of about 175,000, became a province of PNG on independence in 1975.
In 1988, landowner disaffection and rise of the Bougainville Revolutionary Army sparked widespread unrest that approached civil war.
Under a 1998 ceasefire, Australia led a 300-member peace monitoring group.
The 2001 Arawa Peace Agreement ended hostilities and in 2005 the first Autonomous Bougainville Government was elected, with PNG agreeing to a referendum on independence.
More than $250 million in Australian money has gone towards reconstruction on Bougainville since 1997.
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