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The council will dip into a $20million budget over 10 years for the work but is also hoping for help from the NZ Transport Agency (NZTA)
The council help with a trail that will run through the former Chain Hills rail tunnel has pleased Dunedin Tunnels Trail Trust chairman Gerard Hyland, who has been working on, and raising money for, the project.
"I'm thrilled, Mr Hyland said.
"The trust is thrilled."
Future projects, he said, would be fit for purpose and in the right location.
The council will discuss a report on the Dunedin urban cycleways programme next Tuesday.
The programme includes plans to build the tunnel track, provide a connection from the city to St Clair via Hillside and Forbury Rds, and improve cycle infrastructure in Northeast Valley and in the Wharf St, Thomas Burns Dr and Portsmouth Dr area.
Staff will submit the programme to the NZTA for approval.
Mr Saunders said the tunnel trail had been included in part because of the work the trust had done to secure the land and initiate conversations with KiwiRail.
The trust raised $500,000, spent money on property and built part of the track at the tunnel entrance.
"It's at the point now the project can go ahead," Mr Saunders said.
The council's funding would come from its $20 million cycleway budget, but with financial support from the NZTA.
The cost of the trail work, its timing and the level of NZTA funding was not yet known, though in the past the agency had provided 66%.
If the NZTA approved the programme, the council would begin planning individual projects and develop costings.
The tunnel trail would also require agreement with KiwiRail, so there was no time frame for the work.
"If the programme's approved, and we move into design work, then we would be starting to understand what our time frames are."
The St Clair link had been identified as an important connection for commuters.
The Hillside Rd/Forbury Rd route was "only indicative" and would be considered further during design and planning.
NZTA cycle funding would support all projects.
"We just want to get under way so we make the most of that funding."
Not all the projects would be separated cycleways.
Mr Saunders said lessons had been learned from the bungled cycleways in South Dunedin that were built, then removed after design faults emerged.
"We're very aware of those issues, and make sure we consider them carefully through planning.
"I would be confident in future when we do commit to a cycleway project it's the right level of service in the right location."
Mr Hyland said the trust was working to subdivide property at the Wingatui end of the tunnel so it would be protected.
The trail would be on the Abbotsford side of State Highway 1, after which there were existing cycleways accessing Green Island and Kaikorai Valley.
Once it was built, the trust would provide amenities such as signage, picnic spots, rest areas and information boards, and the long-term plan was for the council to take over its maintenance.
The trust had an assurance it would become part of the New Zealand Cycle Trail.
"We would have the branding, we would have the recognition, and it would be Dunedin's proper link to the inland cycleways."