KiwiRail is accelerating work to relocate its Palmerston North operations out of the city as part of plans to develop a regional hub to better handle freight flows throughout the lower North Island.

The company has just received a $40 million commitment from the government's Provincial Growth Fund to help it with the planning process for the project and for land purchase.

Acting chief executive Todd Moyle said the yet-to-be determined site could potentially cover 60 hectares, some of which would be leased to freight forwarders.

It would also need to be long enough to cater for freights trains that can be a kilometre in length, and have sufficient space to support maintenance infrastructure and materials storage.

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Palmerston North is KiwiRail's key staging point for domestic, imported and exported freight in the lower North Island. Rail freight comes and goes from the north, Wellington, Taranaki and Hawke's Bay.

About 2.4 million tonnes moved through the current facility in the past year and that is expected to grow.

"This project leverages the region's strengths and will be fully integrated into the other large investments being made in the regional transport system, including the new Manawatu Gorge road," Regional Economic Development Minister Shane Jones said.

"This is a future-focused investment", with freight tonnages expected to increase by 60 percent during the next 20 years.

Moyle said KiwRail would have invested in the hub, given its strategic importance, but he said the PGF funding had enabled the company to accelerate the work.

"The PGF focus on the regions allowed us to move the freight hub right up our priority list. Without the possibility of PGF funding it would have remained a low priority."

The main trunk rail line originally ran through Palmerston North. It was diverted around the city and the current rail yard established in 1964 on what was then the city's north-western outskirts, but is now surrounded by urban development.

Moyle said the firm will start reviewing potential sites immediately. That includes land inside the city's North East Industrial Zone near the existing rail line and the city's airport. Once potential sites have been identified there will be a process to designate the land for rail use.

Moyle said purchasing land and planning work could take up to three years. Construction would take another two years.

He said the inter-modal rail and road hub needs to be near the city so it can be easily accessed by distribution companies and other businesses. It also needs to connect well with the airport, a freight ring road being planned by the New Zealand Transport Agency and the proposed replacement road for the Manawatu Gorge.

Moyle said KiwiRail would relocate from the current location over time, allowing the existing land to be used for business and housing.