The island would be built by reclaiming land in the shallow waters of Hobsons Bay, just south of the Yarra River mouth between Williamstown and Port Melbourne, and would be big enough for three hulking container vessels to berth at.

The proposed container island has been dubbed "Webb Dock South" in planning documents prepared by state Treasury and handed to the Andrews government's port lease transaction team in February.

It is part of "Project Phillip", a detailed assessment of how to maximise the port's capacity after it is privatised next year.

The government hopes to net at least $6 billion and plans to use the proceeds of the port privatisation to fund its signature promise to remove 50 level crossings by 2022.

Details of Project Phillip, leaked to The Age, reveal the extraordinary steps the government has contemplated to expand the port in the coming decades.

Treasurer Tim Pallas said it was not Andrews government policy to build the container island and said plans for it commenced under the former Napthine government.

"It does not form any part of the Port of Melbourne lease area, and is not included in the capacity estimate for the lease transaction," Mr Pallas said.

A draft transport planning assessment for Project Phillip notes the port is on track to hit capacity within just 20 years, but could grow for 40 years if the island was built, ultimately giving it room to expand until 2055.

By then, about 28,000 trucks a day would visit the port, the assessment predicts, which is more than double current truck traffic volumes.

The man-made island is proposed as the final part of a four-stage expansion of the port, and would not open for business for perhaps another 30 years.

It would potentially defer for decades the need to develop a second container port at Hastings or Bay West, Labor's mooted alternative between Werribee and Geelong.

But the report, by consultancy CH2M Hill, warns any major port expansion is likely to fail without rail.

"If the future estimated number of containers are handled at the Webb Dock facility, some 50 per cent of the port's international container trade, it is unlikely this target could be achieved without reinstatement of a rail option," it states.

It warns also of economically crippling road congestion unless a new rail line is built to Webb Dock.

The proposal for a new freight line is highly detailed in the assessment.

It would mostly run beside Lorimer Street along the same alignment as the disused Webb Dock rail line, which was shut down in 1992 when Docklands was being developed. It would require constructing a new bridge across the Yarra River west of the Bolte Bridge, more than 15 metres above water level and with the ability to draw open so as not to cut off access to Docklands for pleasure craft.

A bascule style bridge like this one at Port Adelaide could be built across the Yarra River as part of plans to build a freight rail line to Webb Dock. Picture: Bilby

The mouth of Moonee Ponds Creek would have to be "realigned", the document notes. A rail viaduct would be built through Fishermans Bend to avoid building new level crossings.

The line would cost $212 million to build, detailed costings in the assessment estimate.

Webb Dock is currently being redeveloped at a cost to taxpayers of $1.6 billion. A new container port capable of handling at least 1 million containers a year is due to open late next year.

The Project Phillip concept was well received by one freight and logistics expert.

Hermione Parsons, director of the Victoria University Institute for Supply Chain and Logistics, said it was crucial for government to consider all options for expanding port capacity, including potentially reclaiming land in the bay. But she warned the social and environmental hurdles for such a project would be huge.

"All options must be seriously explored, including extending Webb Dock out to sea to expand the port's capacity to 8 million containers, because it could be cheaper than creating a new port elsewhere," Dr Parsons said.

She said that shutting down the Webb Dock rail line in the 1990s was a serious long-term planning mistake.

The Port of Melbourne is Australia's busiest, handling about 36 per cent of container trade. But it has poor rail connections and an almost total reliance on trucks.

The Coalition and the Greens have targeted the Andrews government over its failure so far to commit to the port-rail shuttle project, which has languished despite having $58 million of state and federal funds committed to it.

Both have signalled their intention to combine forces and block the port lease. In response, Mr Pallas has said he is prepared to bypass Parliament to privatise the port, even though this would put a significant dent in the lease price.

Mr Pallas said the government would protect all rail reservations within the port footprint.