The Invercargill City Council agreed to stump up the money at a meeting behind closed doors this month, after city councillor and Kakapo Recovery advocacy ranger Karen Arnold brokered the deal.
Arnold is heralding it as a win for the city which will boost tourism and give residents a unique experience with an endangered species.
The enclosure is planned as the latest attraction at the Southland Museum and Art Gallery and will be built alongside the world famous tuatara.
Kakapo are listed as a critically endangered species, with only 126 birds left, all living in the wild.
The money for the project will come from council coffers, adding to the multimillion-dollar investment it is looking to plough into the leaky and earthquake-prone museum building.
Invercargill City Council chief executive Richard King said the enclosure would be built to work in with any construction at the museum in the future and was to be opened by 2016.
The opportunity won unanimous support from city councillors during discussions and it was an exciting opportunity they couldn't turn down, King said.
"We are also looking at this for something to promote the city. They are extremely popular."
That sentiment was echoed by Venture Southland chief executive Paul Casson who said the facility would add to tourist attractions in the region. Tuatara had put Invercargill on the map and it was hoped kakapo could too, Casson said.
Museum manager Paul Horner said there would be actual chicks at the museum only every two or three years for about two months until the birds were transferred to Whenua Hou/Codfish Island. Kakapo breed only when it is a good season for rimu fruit.
The partnership deal meant the Department of Conservation-run programme would provide the staffing, he said.
A 400sqm outdoor area for the birds to forage would be constructed, along with a 200sqm indoor enclosure to house the birds, Horner said.
Presently the birds are hand-reared in a makeshift storeroom at a secret Invercargill location.
The enclosures would give visitors an up-close experience with one of the world's most special birds, Arnold said.
King, Horner and Arnold had visited Rotorua to see how the kiwi programme was run there and Arnold said there were plenty of options for how the venture could work.
The next major breeding season was in 2016 and Arnold expected the enclosure to be running by then.
The council's commitment to the project would not end there though, with it committing $50,000 of ratepayer money a year to the recovery programme if the major sponsor, New Zealand Aluminium Smelters, pulled out of its $200,000-a-year contract.
The company publicly stated its intention to withdraw its support for the programme in 2012 and its contract with the DOC programme expires next year.