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A business case suggested the project could boost Southland's real GDP by about $48 million a year, create more than 500 jobs during the construction phase and a further 300 retail and hospitality jobs once the redevelopment is complete, according to Regional Economic Development Minister Shane Jones.
Funding will come from the $3 billion Provincial Growth Fund.
"These results would be an absolute game-changer for Invercargill and the wider region," Jones said.
He made the announcement tonight to mark the inaugural direct flight between Auckland and Invercargill.
Jones took the flight from Auckland, along with Air New Zealand chief executive Christopher Luxon, whom Jones has criticised in the past over closures of regional routes and his apparent political ambitions.
"It's a happy day for Invercargill and the wider Southland district with new direct flights between Auckland and a provincial growth fund boost of $19.5 million," Jones said.
The loan would go towards a $165 million project to redevelop an entire block in the Invercargill city centre for retail, hospitality, office space and entertainment.
"With the help of the provincial growth fund, the redevelopment is an opportunity to attract businesses and shoppers back to the central city and put vacant or abandoned buildings back into use," Jones said.
The PGF spent almost $1 million to fund the business case, feasibility study, concept designs and procurement strategies.
The redevelopment had been identified as a key project in the Southland regional development strategy action plan, and was being led by key local players including the Invercargill City Council.
"It may be a small city at the bottom of the South Island but it's one with a big vision."