PNG Prime Minister Peter O'Neill has asked the nation's Constitutional and Law Reform Commission to consider replacing the current Westminster system of government with federalism.

The move was first raised by former PM Sir Julius Chan in Parliament last week, who argued it was fair and representative for PNG and the country's 850 cultures.

O'Neill said the prime minister would be directly elected by the people and would consolidate political stability.

"I fully share [Chan's] views because if we are to progress as a nation, we must continue to find ways to improve and consolidate what we have," O'Neill said in a statement.

"We must never be afraid of change that will bring stability and prosperity for the future."

The CLRC was asked to undertake a year-long nationwide consultation and report their findings to Parliament.

Chief Secretary Manasupe Zurenuoc has been asked to liaise with the CLRC to work out the terms of reference for the consultation.

O'Neill came to power in 2011 by unseating PNG's longest serving PM, Sir Michael Somare, in a vote of no confidence while the PM was undergoing heart surgery in Singapore.

A period of political unrest followed, including a failed military coup mutiny by Somare's supporters.

O'Neill returned as PM last year following a national election and now leads a coalition that includes Somare.

He has pledged to resign as PM if he lost the confidence of 56 of PNG's 111 parliamentarians.

But O'Neill also convinced Parliament to pass constitutional amendments that require a month's notice by a fifth of Parliament to bring a vote of no confidence.