The Commonwealth Government has agreed to open Tony Abbott's 'locked box' policy and allowed the Victorian Government to keep the $1.5 billion allocated for the dumped East West Link project.
The money set aside for the toll road will still have conditions attached to it and projects must be agreed upon but a $200 million upgrade of the Monash Freeway, the $11 billion Melbourne Metro rail project, and the $5.5 billion Transurban Western Distributor project are all possibilities but would require federal government approval.
The federal government is supportive of the Monash Freeway upgrade, which will add a third lane to the freeway in the city's south at Hallam, if the federal government and state government agree to pay half.
The Melbourne Metro Rail project is yet to have a business case written. Transurban's Western Distributor plan would require one third federal government money, a third from tolls and one-third from extending Transurban's CityLink concession deed from 2035 to 2050.
Mr Pallas said the business case for that project would be released soon and a decision on whether or not the government would proceed is expected this year.
The decision ends a deadlock between the federal and state governments since the Andrews government was elected 11 months ago.
The Abbott government had long argued that the funding for the East West Link toll road could be used for road and could not be deferred to any other projects, especially the Metro Rail public transport project. Abbott also insisted Victoria had no right to keep the money earmarked for the East West Link project, pointing out that the Napthine government signed an agreement promising to refund it if the road was not built. Mr Abbott claimed a total of $3 billion earmarked for both sections of the road had been placed in a "locked box" for future use.
Mr Turnbull ended the federal ban on funding public transport.
The money has been sitting in the state's bank accounts since May 2014 and is estimated to have accumulated about $60 million in interest, which Mr Pallas said would be put towards road and rail projects.
In April the state government formally axed the East West Link toll road, despite contracts being signed, requiring it to pay an estimated $640 million compensation.
Treasurer Scott Morrison told Fairfax Radio the money was not a "gift voucher". "As treasurer, I want to see projects happen in Victoria and there are a range of projects we can get moving on, so I think it's time to rule a line under that," Mr Morrison said.
Infrastructure Partnerships Australia chief executive Brendan Lyon said it was good to see a "level of consensus between Canberra and Spring Street around using the money for the East West Link for other Victorian projects".
"Victoria needs investment, construction activity and better transport so it's very welcome to a return to collaboration across the tiers of government," he said.
Victorian Employers' Chamber of Commerce and Industry chief executive Mark Stone said he was pleased the Turnbull Government had shown such confidence in infrastructure improvements in Victoria and has opened the funding up to a broader range of projects in the state.
Opposition Leader Matthew Guy said the state government had no major projects ready to go.