Australia’s Productivity Commission has urged governments to make climate change a top consideration in water policy with severe droughts and floods predicted to increase.

The Productivity Commission on Thursday released its draft report into the national water initiative, a federal-state reform agreement.

It calls for a new NWI to include climate change, warning droughts will become more frequent, severe and prolonged as population growth increases water scarcity.

Planning will need to include climate and population growth, which are set to sap the amount of water available for the environment, urban populations and farmers.

Commissioner Jane Doolan said an estimated additional 11 million people would be living in Australia’s capital cities by 2050.

“Climate change is likely to mean significant reductions in water availability for most of the country and an increase in the frequency and severity of droughts and floods across the nation,” she said.

“The NWI needs to be refocused to provide strong guidance on how to adapt water management to best meet our needs in a changing climate.”

Under a worst-case scenario, Melbourne’s demand for water would outstrip supply in 2028.

“Water planning will need to be able to account for and incorporate changes in the availability of water due to climate change,” the report says.

The commission calls for Indigenous people to be given a greater say in water use to support cultural objectives and economic development.

The draft report also launches a scathing assessment of governments’ funding decisions around dams, weirs, pipelines and other water infrastructure projects.

It finds seven projects received federal funding without businesses cases or environmental approvals.

The Rookwood Weir in Queensland is used as an example of a funding commitment at odds with Infrastructure Australia’s independent project evaluations.

The harshest criticism is reserved for the $484 million Dungowan dam near Tamworth in NSW, which is being funded on a 50-50 basis by the federal and state government.

The dam is estimated to provide an extra six gigalitres of water a year with a current market value of $11 million.

Directly buying the same amount of water would cost 2 per cent of the price of the dam.

Based on the cost of the dam, the extra six gigalitres would be valued at 44 times the current market rates for irrigators.

Water Minister Keith Pitt said he was still working his way through the report but still backed the dam.

“If we want to be able to deal with some of the challenges that are here now and of course that are coming, then we need better infrastructure like that dam,” he told ABC radio.

Prime Minister Scott Morrison and Nationals leader Michael McCormack have made separate funding announcements for the dam in the past 18 months.

The commission warned maintaining the same approach to funding water infrastructure would unnecessarily burden taxpayers.

Economic viability, ecological sustainability and user-pays principles should be reinforced, the report says.

Under the recommendations, mining and petrol companies would no longer be exempt from planning requirements faced by farmers and other water users.

-AAP