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Festival President Bruce Leishman said his committee was delighted to be able to play a role in what he described as a "landmark development" for the community.
"Moyne Health Services has played a critical role in our community for more than 160 years, and this redevelopment is timely," Mr Leishman said.
"The Port Fairy Folk Festival committee is thrilled to be able to make this contribution, which is an accumulation of funds due to the commitment of our volunteer organisations."
The $5 million redevelopment has already started at the Health Services' Villiers street site, with the demolition of the old community health building late last year and construction of the new building now underway.
MHS Chief Executive David Lee said that MHS now had $1.88 million including the Port Fairy Folk Festival Committee contribution and there was a shortfall of about $155,000 to complete the project.
Mr Lee said the new building has been designed with the future in mind.
"The old buildings have not been fit for purpose for some time," Mr Lee said.
"Aside from lack of suitable space, there were problems with car parking and access, so we took the time to develop a total Masterplan for the site that will take us into the future."
With the Folk Festival contributions, a $3 million Victorian Government grant and $250,000 from MHS, the development includes the demolition of the old community health building, construction of an underground car park and ground-level building with the shell of a second storey.
"The second story gives us great options for the future, with room to grow and deliver new services for our evolving communities," Mr Lee said.
He said MHS was making approaches to government and philanthropics trusts to help fund the final piece of the current redevelopment plans - the construction of a new urgent care centre at the corner of Regent and Villiers streets.