Along with State Grid Corp, Cheung Kong Infrastructure, the largest publicly-listed infrastructure company in Hong Kong, is also waiting for government clearance to purchase a 99-year lease for 50.4 per cent of Ausgrid.

State Grid Corp already owns electricity networks in South Australia and Victoria and was cleared by the Foreign Investment Review Board to bid last year for Transgrid, a NSW electricity distributor that was sold to Canadian interests.

New briefings

Sources said the change in ministers last year meant the bureaucracy had to work hard to explain to the government's new leaders the threat posed by Chinese espionage, and the discovery of several Chinese agents "red handed" had highlighted the security challenges.

Security experts said Chinese security services were active in Australia and making Ausgrid the responsibility of a company controlled by the Chinese central government was too great a risk.

Treasurer Scott Morrison seems to not be afraid of vetoing the deal, which would fund a large part of the NSW Coalition government's new infrastructure projects. James Brickwood

"The public has to understand that there are some countries taking substantial intelligence operations against this country," said Ross Babbage, a former senior Defence Department official and the managing director of consulting firm Strategy International.

"This is not a figment of someone's imagination. It takes a big leap of faith to say there is no security risk [from selling Ausgrid]."


Former Ausgrid chief George Maltabarow said critics of State Grid Corp's bid were "xenophobic" and security threats could be resolved by the buyer.

"I don't really believe that the security concerns are really justified and some of it seems to be just plain xenophobia to me, populist xenophobia that you do get from some politicians," Mr Maltabarow said.

Ausgrid has been state owned for 112 years and provides all of Sydney's electricity. Kate Geraghty

"The idea that somehow the governance of the company is going to be result in security being compromised I think is just pathetic. Quite frankly, if the Chinese wanted to hack into the Ausgrid systems, they don't need to own it."

Former Prime Minister Tony Abbott added his voice to the debate on Monday, saying he was not opposed to foreign investment, but there should be a way of selling the grid that does not cede control of the asset.

Ausgrid, which has been state owned for 112 years, supplies electricity to Sydney, the NSW Central Coast and the Hunter Valley. It has more than 200 large electricity substations, 30,000 small distribution substations, 500,000 power poles and almost 50,000 kilometres of below and above-ground electricity cables.

Security gap

Deakin University Research Fellow Shihanur Rahman, who researches grid cyber security, said it was entirely possible for a grid to become a target if it was sold to a foreign government. "For the data that is stored in a secure database, what we called secure, the existing security is not sufficient," he said.

The NSW government plans to use the money from the sale to extend a major freeway, build a rail crossing across Sydney Harbour, and invest more schools, hospitals, regional transport, water security and tourism. Knocking one of the bidders out could reduce the amount the NSW government gets.

Prime Minister Malcolm Turnbull wasn't a member of the Cabinet national security subcommittee under the Abbott government, which faced a similarly tough choice when it decided to ban a Chinese phone-equipment manufacturer, Huawei, from building any of the national broadband network.

Mr Turnbull, who was the communications minister, was reported at the time to be in favour of allowing the Chinese company to participate in the project.