New South Wales (NSW) transport minister Gladys Berejiklian has approved the $1.6bn new CBD and South East light rail project.
The contract to design, build, operate and maintain the new system will be awarded as a public private partnership by early 2015.
The CBD and South East Light Rail will connect Circular Quay and Central, Randwick Racecourse, the University of NSW and Prince of Wales Hospital at Randwick.
Berejiklian said: "Light rail will bring major benefits for Sydneysiders, including significantly improved access to modern and reliable public transport, a boost to local businesses and access to sporting, entertainment, health and education precincts. We have no doubt it will also result in urban renewal and economic development."
The 12km long route includes 20 light rail stops and it will operate a fleet of electric-powered low-floor light rail vehicles.
The project also includes the development of a pedestrian zone along George Street, between Hunter and Bathurst Streets.
The light rail project is expected to deliver economic benefits worth more than $4bn, as well as create 10,000 jobs in the region. It is scheduled to become operational by 2020.