Staff at KiwiRail's Hillside railway engineering workshop in Dunedin were shocked at today's announcement their workplace was up for sale, their union representative says.

The state-owned rail company made the surprise announcement this morning, blindsiding around 130 people employed at the south Dunedin workshops.

"There was genuine shock, given that these workers have been through a lot over the last few years," Rail and Maritime Transport Union General Secretary Wayne Butson said.

"They give their heart and soul every time they come to work. They didn't expect it to be for sale."

Hillside has long been one of Dunedin's biggest employers, and in its heyday employed more than 1000 people making railway engines and rolling stock.

KiwiRail has steadily decreased the workload at Hillside, and last year laid off 44 workers.

The business will be advertised for sale as a going concern from early May, with a final decision by August.

KiwiRail chief executive Jim Quinn said the decision would be difficult for staff, and had been made after analysing the financial impact of the reduction in construction and refurbishment forward work orders for Hillside.

"We are looking for a sale outcome that secures Hillside's future as New Zealand's largest heavy engineering site," Quinn said.

"If this type of sale eventuates we will then continue to allocate some heavy maintenance work on commercial terms to the new owners of the facility.

"We think this is an ideal opportunity for a business with more industrial commercial engineering experience and a wider customer base to take the site over. They can target these customers with more product scope than we could."

Rail and Maritime Transport Union Hillside branch chairman Stuart Johnstone said workers were optimistic, despite the initial shock of the announcement.

"It is an opportunity for the future," he said.

"It's no secret that KiwiRail have had problems managing Hillside and this gives the opportunity for the workers with a new management team coming in to really flourish and the workers want to do that... As far as our engineering skills go we can tackle almost any job."

Hillside has long been one of Dunedin's biggest employers, and in its heyday employed more than 1000 people making railway engines and rolling stock.

Dunedin civic and business interests banded together in 2010 to lobby for Hillside's survival.

As well as being a major employer, Hillside plays an important role in the city's engineering hub, and generates an estimated $20-$30m annually for the Dunedin economy.

Mayor Dave Cull tried to put a positive spin on today's announcement, calling it a potential positive for Dunedin.

"Sometimes the ideal solution isn't available so you have to take the best one. This one appears to be the best move forward in terms of the future of Hillside workshop.

"The axe has been hanging above Hillside workshops for some time... there has been speculation they might just close the place. They're not closing the place, they're saying let's give it a go."

Dunedin had a shortage of industrial land, and Hillside's proximity to the Carisbrook rugby ground - also zoned industrial and also on the market - might be an opportunity, Cull said.

"It won't just be a rail workshop. If it's going to be successful it can't just be a rail workshop - there's not enough work for it here under the current circumstances."

Chamber of Commerce chief executive John Christie, who played a leading role in the Save Hillside campaign, said he was not surprised KiwiRail had put the workshops up for sale. He hoped Hillside would remain an important engineering business for Dunedin.

"It would be a tragedy to see the jobs and resources lost there and for that to be turned into something other than a good, economically viable business. I'm optimistic KiwiRail will be looking to get more than just a firesale price for buildings and land."

The future of the south Dunedin landmark - a massive maze of sheds and workshops - has been uncertain for two years.

In 2010, KiwiRail declined to tender on Hillside's behalf for its own $500m contract to build new trains for the Auckland commuter rail system, and later that year also decided to award a contract for 500 flat top wagons overseas rather than utilise Hillside or its sister workshop in Wellington, Woburn.

Dunedin South Labour MP Clare Curran, whose electorate office is directly opposite Hillside, said KiwiRail had deliberately run down the workshops.

"It has refused to allow them to tender for work they should have been tendering for. It has been their long-term strategy to run the workshops down... and what gives them the right to sell it without public discussion? It is a public asset."

Dunedin-based National List MP Michael Woodhouse said the sale of Hillside was potentially a positive development.

"The sale of Hillside is a great opportunity for owners with more commercial engineering experience and a wider customer base. New opportunities exist nationally and internationally for a new owner to grow the business beyond just rail needs.

"This decision is by no mean the demise of Hillside. But the sale and future success of Hillside will largely depend on the reactions of the unions and Dunedin residents and the support they choose to give to potential new owners."

Green Party co-leader Metiria Turei blamed a lack of governmental support of local manufacturers for Kiwirail's decision to sell Hillside.

"The privatisation of Hillside is a direct result of the Government's refusal to implement a smart procurement policy," Dunedin-based Turei said.

"A BERL report showed that having the new Kiwirail rolling stock for Auckland built at Hillside would have added $250m to the economy, reduced the current account deficit by $122m and created 1270 jobs. Unfortunately, National insisted that Kiwirail only consider its narrow commercial interests and ignore the wider impacts of its decision.

"National's neglect led to rolling stock contracts, along with the profits and the jobs, going offshore. That has now led to Hillside's sale."