KIAMA Hospital will receive an $8 million grant from the Restart NSW Illawarra Infrastructure Fund to upgrade it into a centre of aged care excellence.
The proposal for a 134-bed facility was one of 12 successful projects to share in $100 million from the lease of Port Kembla.
The funding was announced by the Minister for the Illawarra John Ajaka on Thursday,
Mr Ajaka said successful applicants would contribute an additional $90 million to their projects.
"The real result for the Illawarra is an investment of $190 million," he said.
The hospital project will include restoration and refurbishment of Barroul House and use of the Nightingale Wing.
The Illawarra-Shoalhaven Local Health District would also provide improved community and out-patient health services from the facility. The University of Wollongong will undertake dementia residential care research and train students in gerontology.
Kiama Mayor Brian Petschler said construction would be staged throughout two years once the land purchase was settled.
"We think that's a great contribution to this locality - it will have a great accelerator effect in my opinion," he said.
"It makes it so much easier to do the refurbishment the way we want to do it."
The project will generate 69 new jobs in the long-term, with 194 jobs available during construction.
Cr Petschler said the hospital redevelopment would not affect the 203 Blue Haven Retirement Village independent living units, only the nursing home and hostel, which will not meet accreditation standards in 2016 unless sprinkler systems are installed.
Member for Kiama Gareth Ward said the project almost missed out, but had succeeded due to strong lobbying.
"Infrastructure should reflect the community it serves and this was a great vision to achieve that growing need," he said.
However, the Kiama Harbour project missed out on Restart funding.
While Mr Ajaka would not comment on why certain projects were overlooked, he said unsuccessful applicants were welcome to discuss their application with him.
"I've made it clear to those who were unsuccessful, and will continue to send that message, that my door is open to them," he said.
"I am meeting a number of them . . . to see if there's any other source of funding that I can assist with.
"I don't want them closing the doors on their applications."
Mr Ward said the assessment panel had to take into account the pool of funding available and the number of jobs created by each of the projects.
However, the harbour will not be left completely without funding.
There had been doubts over whether $450,000 in Regional Development Australia funds allocated to the project would be honoured after the federal Coalition government's election in September, but Member for Gilmore Ann Sudmalis has confirmed the funding will be granted.