"The spa and hotel facility will be the first stage of a multimillion-dollar redevelopment of 11 hectares of prime lakefront property, close to the CBD, that will transform the central city and will attract more visitors to Rotorua," he said.
Mr Key said tourism was a significant part of Rotorua's economy and a major employer.
"The World Spa project aims to develop an international standard spa and wellness complex on Rotorua's lakefront. The Rotorua [Lakes] Council has set a goal of 1.5 million commercial spa visits yearly, and the development of this new spa complex will certainly help with achieving that goal," Mr Key said.
The land is owned by Ngati Whakaue and administered by the Pukeroa Oruawhata Trust.
Pukeroa Oruawhata Group is developing the spa with World Spa Limited, whose director is former QE Health general manager Peter Sharplin.
Mr Sharplin said the investment was a really good "shot in the arm" for the project, which they had been working on for more than nine months. He said the design would be unlike any spa seen to date.
"We're really excited about the product concept that has been developed and final level of review, and due diligence looks to support the commercial viability of the project. The aim is to develop an entirely new format of spa offering that complements, rather than necessarily competes with, existing spas."
He said a World Spa blog would be developed soon to provide updates on planning and progress.
Peter Faulkner of Pukeroa Oruawhata Group said it was the first stage of a much larger redevelopment at the lakefront.
"The scale of the larger redevelopment is a game-changer for Rotorua and will become a key driver of economic growth for the city. We are still working through our plans for the wider site. However, a central theme for the overall development will be the area's historical connection with wellness," he said.
"We expect the spa to open in 2017 and at capacity will provide 120 new jobs."
Trust chairman Malcolm Short said the development would help bring a focus to the Lakefront.
"The city will benefit hugely from the right development on that site. We aim to knit the city together between the Rotorua Central end [of town], which has pretty much been developed, and just being inclusive about the whole town."
Rotorua Mayor Steve Chadwick said the project had been a long time in the planning.
"This is their [Ngati Whakaue's] baby," she said.
"We have got to get the planning right and that's what they are focusing on at that moment."
The funding comes from the Tourism Growth Partnership fund, a contestable fund for projects that seek to boost innovation and productivity in the tourism sector.
Jordan Williams of activist group the Taxpayers Union called the funding "corporate welfare at its very worst" that was "pulling tourism out of other regions to bolster a favoured business".
But Mr McClay said Mr Williams should visit a few regions where the Government was providing support before criticising.
"I invite Mr Williams to visit Rotorua and learn about the value of these local projects first-hand, if he's not too busy," he said. Grow Rotorua chief executive Francis Pauwels said securing the funding was "no mean feat".
"The World Spa people had to pitch to a Dragons' Den made up of highly respected business people in the tourism sector. It is a reflection of the quality of the concept, the planning and the potential to be successful, and we really congratulate all the people involved."
Grow Rotorua had invested significantly over the past two years to build the global research, networks and investment potential, he said.
"[Yesterday's] announcement of adding a major high-value tourism offering to the city is a real game-changer to position Rotorua as a world class spa, health and wellness destination. It will also encourage further investment and interest in the industry.
"These types of complexes are great employment generators and a key part of the whole programme has been to work with education providers on the skills and training opportunities as well.
"The World Spa will address the mega-trends of an ageing population and rising healthcare costs, providing a wellbeing option which makes the most of our incredible geothermal resources.
He said it was a significant step forward for Maori economic development in the region.
-See rotoruadailypost.co.nz for video of John Key's announcement.
- Additional reporting Rebecca Malcolm
