The Government has approved $115 million for new carriages and locomotives for KiwiRail.
The funding for 17 passenger carriages and 20 new locomotives will come from existing budgets and borrowing.
Finance Minister Bill English says almost $40 million will be spent replacing carriages on the Tranz Scenic passenger routes, which are more than 70 years old.
The work will be carried out by KiwiRail's Hillside Engineering workshop in Dunedin and paid for out of money set aside in last year's Budget.
KiwiRail will borrow the remaining $75 million to buy 20 new locomotives from China and expected by August 2010.
Mr English says they will boost productivity on key freight routes and allow KiwiRail to to free up locomotives for Auckland metro passenger routes.
However, he warned that despite $3 billion being committed to New Zealand's rail network over the next four to five years, some cutbacks will have to be made.