Some $5 billion of new investment would be needed in new water infrastructure to deal with climate change, according to a 2019 estimate by the Department of Planning, Industry and Environment, the report said.

Government has already invested $1 billion on new water infrastructure through the Safe and Secure Water Program.

But the Auditor-General's report found the money had been spent without a "strategic approach for targeting town water infrastructure".

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A third of funded projects were not assessed transparently, or in a way consistent with good practice grants administration, the report said.

"The department does not have strategic water plans in place at state and regional levels: a key objective of these is to improve town water for regional communities," the report found.

The NSW government only began developing a state water strategy in 2020, the report said - after dozens of communities came within weeks of running dry last year.

"The Department of Planning, Industry and Environment has not effectively supported or overseen town water infrastructure planning in regional NSW since at least 2014," the Auditor-General report said.

The report, released Thursday, recommended that by October 2021, the Department should improve a long list of practices including data collection, regulation, coordination and administration of local water utilities. It also recommended better interagency coordination, better governance arrangements, better transparency and the state better consult with local government, which often owns and operates local water utilities.

Labor and Greens politicians used the report to condemn the government as "incompetent" and "asleep at the wheel".

"This Government has put new roads, tunnels and stadiums in Sydney ahead of the needs of rural and regional NSW. It failed to take action on important commitments it made on water supply and the impact on communities has been absolutely devastating," Labor Shadow Minister for Water Clayton Barr said.

"This Report shows that the National Party has failed regional communities. By not developing a water strategy to ensure we could survive the worst droughts, towns ran out of water and many others approached 'Day Zero'," Greens water spokesperson Cate Faehrmann said.

Minister for Water Melinda Pavey was contacted for comment.

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