Minister of Transport Simon Bridges said early estimates indicated the cost of improvements could be up to $50 million.
Mr Bridges and Minister of State Owned Enterprises Todd McClay visited the tunnel at the weekend and saw first-hand the extent of the work needed.
The tunnel was closed only twice a year and the visit was considered "like gold dust".
"The purpose of the visit was to understand our investment as a country in this critical link, which is vital to improving freight efficiency and productivity to the Bay of Plenty," Mr Bridges said.
"The Kaimai Tunnel is an iconic and important piece of infrastructure to the Bay of Plenty."
Mr McClay said Saturday's visit gave them a chance to welcome the work.
"This is a substantial piece of work to improve and refurbish the track and tunnel floor, and to ensure it is prepared for future increased demand," he said.
Work will future proof the busy transport route that links the Bay of Plenty to the Waikato, Auckland and beyond, he said.
Neil Mason, Kaimai Tunnel project manager and Tauranga engineer, said his team had been planning the visit over the past year.
"It's an important day for us. The tunnel is only ever closed off twice in a year so we consider these days to be like gold dust," Mr Mason said. "This is the most serious upgrade to happen since the tunnel opened."
Future financial commitments beyond 2017 will be determined as part of the secondary investigation phase.
Kaimai Tunnel
* Work on the tunnel began in 1965.
* This was the first tunnel in New Zealand to use a tunnel-boring machine.
* In 1970, a cave-in trapped 12 workers, killing four.
* Freight transported through the tunnel includes inter-port container traffic, timber and timber products, coal, manufactured goods, and petrol.
* About 36 freight trains pass through the tunnel on a week day.
* Each train weighs at least 2.5 tonnes.
