But in Auckland a committee is mulling higher rates or a combination of rates rises, tolls, or congestion charges on existing and new roads to pay the region's share. The committee is due to report on July 15.
Mayor Len Brown hopes the twin-tunnel project can be built for "significantly less" than an Auckland Transport cost estimate of $2.86 billion in inflation-adjusted terms, which includes $300 million for new trains.
"It's the biggest project in New Zealand's history and we will be looking for a good price," he told the Herald last night.
Even so, his council will be faced with a tough decision on how to pay for its half-share of the project once a 17-member mayoral "consensus-building group" delivers its report next month on how the city will fill an estimated $12 billion funding gap for the tunnels and other transport needs by 2041.
Councillor Cameron Brewer called for a referendum to decide how Aucklanders should pay for the project out of concern that ratepayers were paying too much already.
Mr Brown said 69 properties would be bought by the council, and a further seven buildings partly bought. The tunnels will go under 200 properties.
Yesterday's huge turnaround came with a five-year delay to the construction starting date.
Mr Key said the money would come from a combination of sources and he would not not rule out using the Future Investment Fund, which held the proceeds from the partial sale of state-owned energy companies.
Labour Party Auckland issues spokesman Phil Twyford said paying for the railway with money from asset sales was "a bitter pill to swallow" for Aucklanders, the majority of whom opposed the asset sales programme.
The announcement came 45 years after rapid rail was first proposed by former mayor Sir Dove-Myer Robinson, and marked a huge first-term victory for Mr Brown, who was elected on a campaign of several rail promises for Auckland.
The mayor hopes to pull the Government forward from its proposed 2020 start date for the project to 2017 or 2018. The construction was projected to take five years, but Mr Brown hoped it could be cut to two or three years. The network was expected to double Auckland's total rail trips to nearly 30 million a year.
The announcement also marked a turnaround for the National-led Government, which has been outspoken in its criticism of the rail loop.
Transport Minister Gerry Brownlee and Economic Development Minister Steven Joyce have repeatedly dismissed the idea as too expensive and ineffective at removing cars from Auckland's roads.
In March, Mr Brownlee described it as a "relatively short piece of rail for very modest gains".
It is understood that Mr Key helped pushed the deal through.
Labour MPs mocked National in Parliament yesterday, with Mr Twyford saying Mr Key was the "first person ever to make a u-turn in a train".
What happens next
• Formal Government announcement tomorrow.
• Half funding to be found by Government.
• Half funding from Auckland either through rates rises or road charges or a combination.
• Work to start by 2020.
• Trains running by 2025.
