The treaty will allow prisoners to serve out the remainder of their sentences in their home country.

There are currently five Australian prisoners in jails in Cambodia and 13 Cambodians in prison in Australia.

Under the treaty, prisoners must apply for a transfer, and both countries and the prisoner must agree to the arrangement.

Justice Minister Chris Ellison says a prisoner exchange agreement with Cambodia is an important and practical measure.

"I think that some people misunderstand the nature of it," he said.

"It is not a means of reducing a sentence, it's a means of returning a person to their home country to serve out a sentence, and also come under community supervision of their home country." Aid

Prime Minister John Howard has announced a range of new aid measures for Cambodia.

Australia will provide $30 million to improve Cambodia's criminal justice system, and $45 million over five years for agricultural assistance.

Mr Howard told Mr Hun Sen it was important frank discussions continued between the two countries.

"Both about the way in which we can best assist you, the importance we place on the institutions of your country, and different ways in which we can help in a constructive fashion to improve and strengthen the governance of Cambodia," Mr Howard said