The state government is to sell off its largest remaining port - at Newcastle - in a move that will raise an estimated $700 million, with about half the proceeds to be used to revitalise the city's infrastructure.
Following the success of the sale of Botany and Port Kembla ports, the Newcastle port will be leased for 99 years.
Announcing the strategy as part of the state budget on Tuesday, Treasurer Mike Baird said about $340 million of the proceeds will be spent on a revitalisation project for Newcastle, including light rail. The government will also tip an extra $120 million from other sources into the project.
The proposed light rail will link Wickham and Newcastle, and is expected to be extended. The government will spend $10 million to explore the potential for this link to spread to surrounding suburbs and beaches.
Superannuation funds have expressed "lots of interest" in the Newcastle port lease, Mr Baird said. A scoping study will provide further detail of the site's potential.
The expected revenue of $700 million from the sale is probably a conservative estimate.
Mr Baird said the venture is "a fantastic opportunity for Newcastle off the back of this budget". The 2013-14 budget will invest a total of $60 billion in infrastructure across the state.
Opposition Leader John Robertson said the O'Farrell government's decision to privatise the port is a "bad deal" that will cheat the Hunter out of its key asset.
"The O'Farrell government is selling off the biggest coal port in the world to replace a heavy rail line with a light rail line," he said.
"That's not a win for the Hunter - it's a gun to the head.
"Hunter residents and businesses already contribute more than $1 billion in royalties and taxes to Sydney - why couldn't the money have come from there?"
Mr Robertson said Newcastle port generates revenue of $70 million a year. "Once privatised, that revenue stream is gone forever - a stream worth much more than just $340 million," he said.
Andrew Jefferies, the general manager of Tourism Industry Council NSW, said Newcastle's revitalisation was a critical step for tourism in the Hunter.
"I'm glad to see the government renew its focus on our state's second largest city," he said.
Brendan Lyon, the chief executive of Infrastructure Partnerships Australia, said privatising Newcastle port made sense.
"When you've got economic and social infrastructure requirements and an inflexible budget and a high level of debt it would be hard to understand the case against privatisation," he said.
"There is clearly a global appetite from investors who are wanting exposure to important economic assets like ports and electricity, so governments in other places around Australia should be paying close attention."
Mr Baird said in April that Port Botany and Port Kembla will contribute a combined $5.07 billion to the government, to be spent on infrastructure projects including the planned WestConnex motorway and an upgrade to the Pacific Highway.
He said the consortium NSW Ports has agreed to pay $4.31 billion for Port Botany and $760 million for Port Kembla for a 99-year lease.
The result was well above the $3 billion expected from the sale, which was announced in the budget brought down last year.