The Deputy Prime Minister will meet with the NSW government in the coming days to discuss large-scale water infrastructure projects, including what to do with the funding for Dungowan Dam.
The federal government has committed $75 million to upgrade the dam from 6.3GL to 22GL, however the money has been sitting unused for the past three budget cycles, and there is a fear it will be lost if not used soon.
With a price tag of $484 million, the NSW government is reluctant to push ahead with the upgrade.
However, Deputy Prime Minister Michael McCormack said he was willing to let the money be used for another water project in the region, and will invite NSW Water Minister Melinda Pavey to put forward alternative projects - an offer he made to her predecessor Niall Blair last year.
"The government stands by its commitment to providing $75 million to co-fund the construction of the new Dungowan Dam," Mr McCormack's spokesperson said.
"But, it will of course listen to requests from the NSW government to consider alternative projects if there are better options that can deliver increased water supply and security for farmers and communities in the region."
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Mr McCormack will also discuss opportunities for the two governments to "work together to build water infrastructure projects that will increase water supply and security for regional communities".
"The federal government is committed to working with the NSW government to build the water infrastructure that best meets the region's needs," the spokesperson said.
So far, the state government has been unwilling to commit to any large water projects in the Namoi and Peel valleys until it finishes a study, which is due to be completed by the end of 2020.
Tamworth mayor Col Murray said council had split its water security approach in to a short-term plan and a long-term plan.
"We're still keen on Dungowan as the long-term option," Cr Murray said.
"We wouldn't want to compromise the long term for the short term, but in saying that, I'm sure council would be prepared to consider [other options for the $75 million] if they were put forward by the state government."