A parliamentary inquiry has narrowly stopped short of recommending the new Dungowan Dam not proceed.
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Instead, the second stage of the Legislative Council's dams inquiry, released on Wednesday, recommended the state government investigate alternatives to the $484 million Dungowan dam project, like water recycling, "as a matter of urgency".
The committee "was not convinced by the evidence that the proposed Dungowan Dam would secure Tamworth's future water availability" the report said.
The inquiry warned the scheme's budget may blow out, and the benefits of the scheme had not yet been demonstrated.
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The inquiry was initially set to recommend that "the NSW Government not proceed with the Dungowan Dam and Pipeline Project, due to the significant and persuasive arguments against the project" including high cost and ecological concerns.
But Labor MLC Rose Jackson voted with conservative members of the committee to water down the language, over the protests of its Greens and Animal Justice Party members.
The final inquiry report recommended the NSW government "investigate alternative options to ensure water security in the Peel Valley, including managed aquifer recharge, water efficiency and water recycling as a matter of urgency".
It found that the "claimed economic and water security benefits to Tamworth of the election commitment to build the Dungowan Dam are yet to be demonstrated".
And it recommended the NSW government address community concern about the high cost of the scheme, limited water yielded, the impacts of climate change on likely water take and its ecological impacts.
Committee Chair, Greens MLC Cate Faehrmann said the dam poses "unacceptable risks to our already struggling river and wetlands systems".
"It was not clear how these investment decisions were made, and if other more efficient and more sustainable options had been explored," she said.
Witnesses told the inquiry the new dams were about providing more water for irrigation, not for town water supply, she said.
A spokesperson for Tamworth Regional Council said it continues to advocate for the new Dungowan Dam and Pipeline, despite alternatives, because it believes the new dam will provide improved water security.
"Council remains in support of the new dam and pipeline considering the funding already committed to the project and the absence of any other options at this time," she said.
"Council will be able to make a better-informed decision and statement regarding the project when the Environmental Impact Study and Business Case are released."
The Tamworth Water Security Alliance has welcomed the inquiry's recommendations.
"Tamworth Water Security Alliance has been advocating that the $484 million of public money slated for Dungowan Dam would be better invested in more secure, sustainable and long-term solutions such as purified recycled water for Tamworth households", said alliance member David McKinnon, who gave evidence to the inquiry.
Barnaby Joyce told a Tamworth radio station this week that it was time to "stop the studies and start moving dirt".
"I've got a sneaking suspicion they're going to ask for more money and I'll have to find it and I will," he said.
A spokesperson for Water Minister Melinda Pavey said "the government will respond to the report in due course".
The dam will provide enough water for about 120,000 people to live in Tamworth, Ms Pavey told media in February.
The business case for the dam is set to be completed by the end of the year, she said at the time.
In February, the Productivity Commission described the project as having "poor viability".
The state government is due to respond to the inquiry by January next year.
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