Australia’s competition watchdog is challenging a deal made by the New South Wales government when it privatised Port Botany and Port Kembla five years ago as anti-competitive and illegal.

The Australian Competition and Consumer Commission on Monday said it had instituted proceedings in the federal court against NSW Ports – which now operates Botany and Kembla – over a deal it made with the Coalition government when the ports were privatised in 2013.

The $5.1bn deal contained provisions requiring the Port of Newcastle to compensate NSW Ports if it developed a rival container terminal allowing goods to enter NSW without passing through Sydney.

“We are alleging that making these agreements ... is anti-competitive and illegal,” the ACCC chairman, Rod Sims, said.

Despite the state government’s involvement, it is “not currently a party to the ACCC’s proceedings and the ACCC is not seeking orders against the state”, he said.

However, Sims was scathing of the government’s approach.

“I have long voiced concerns about the short-term thinking of state governments when privatising assets and making decisions primarily to boost sales proceeds, at the expense of creating a long-term competitive market,” he said. “These anti-competitive decisions ultimately cost consumers in those states and impact the wider economy in the long term.”

The deal essentially means the Port of Newcastle – which was privatised in 2014 – cannot develop a container terminal for 50 years.

“If a competing container terminal cannot be developed at the Port of Newcastle, NSW Ports will remain the only major supplier of port services for container cargo in NSW,” Sims said.

The ACCC wants the federal court to declare that the 2013 and 2014 deeds contravene the Competition and Consumer Act.

The watchdog is seeking injunctions restraining the operators of Port Botany and Port Kembla from seeking compensation from Newcastle as well as pecuniary penalties and costs.

The NSW premier, Gladys Berejiklian, on Monday said the government stood by its decisions.

“Obviously the ACCC is doing its job and we look forward to the outcome,” she told reporters.

NSW Ports said it firmly believed the 2013 agreement was in the best interests of stakeholders, the community and the economy.

“NSW Ports will be vigorously defending the proceedings,” a spokesman said.