The interim report by former senior water bureaucrat Ken Matthews said the Berejiklian government should consolidate all water compliance and enforcement into the Department of Industry "at arms length" from the Department of Primary Industries' water division.

Both Labor and the Greens called for water minister Niall Blair, the deputy NSW Nationals leader, to be stripped of the portfolio given the record of big irrigators donating to the party and the report's conclusions of poor oversight.

Among Mr Matthews' key findings are that the overall standard of NSW enforcement "has been poor", with metering of water extraction from the Barwon-Darling River in northern NSW "not at the standard required for sound water management".

The Independent Commission Against Corruption (ICAC) began its own probe last month. To avoid "complications" of conducting parallel investigations, Mr Matthews suspended his own group's investigatory work and handed relevant material to the ICAC.

In doing so, it also "considerably reduced" details it could reveal now into alleged water theft without compromising the ICAC's work.

Even so, the report - prompted by a Four Corners report in July - singled out certain farmers including Peter Harris and his family, owners of several big properties in the state.

The TV program alleged the family had failed to keep a log book of water extraction at its Miralwyn property, and that Mr Harris had been issued a Stop Work Order that had been poorly handled by DPI-Water.

"The information reviewed indicated there may have been prima facie evidence of substantive breaches of the Water Management Act 2000. However, the allegations were not systematically followed up," it said, adding that the statute of limitations would require any charges to be laid by August 2018.

Fairfax Media sought comment from Mr Harris. Horton Rhodes, a lawyer for Mr Harris told the Matthews investigation his client "has never knowingly caused water to be pumped for the benefit of any of his properties in contravention or breach of any term of water access licences" held by his companies.

New regulator needed

The Matthews report recommends a range of "urgent" measures, including the creation of a legislated NSW Natural Resources Regulator that would take on water and eventually other resource issues. The government said it would act on that recommendation.

"The locus of compliance responsibility would be clear and leadership and decision-making authority would be unambiguous," the report said. "That is not the case now."

The Matthews report is one of six separate inquiries under way after the Four Corners report highlighted cases of irrigators installing equipment that took billions of litres of water, potentially undermining confidence in the entire $13 billion Murray Darling Basin recovery plan.

Mr Blair, the Department of Primary Industries Minister, told a media conference that the interim report was "pretty sober" reading for the government, revealing "failures", some of which would be acted on immediately.

"Where they do not exist, urgent installation of water meters for all large users in NSW within 12 months will be a top priority," Mr Blair, said in an earlier statement.

"It's imperative that larger users have adequate, functioning water meters installed, given the volume of water needed to support farming and the impact this has on smaller users."

Mr Blair declined to answer questions as to whether the Nationals would continue to receive donations from Mr Harris or other big irrigators.

"Donations are handled by the [party's] head office," he said. "It's not something I have any exposure to."

The minister also said Mr Harris had not approached him after the airing of the TV report.

"No. My diary is readily available for everyone to have a look at."

Mr Blair denied there was a conflict of interest for the Nationals to be taking donations from irrigators while managing the water portfolio.

"I believe the majority of irrigators are doing the right thing," he said.

'Potential loss of confidence'

A senior NSW bureaucrat, Gavin Hanlon, is "commencing misconduct procedures", and has been stood down. Mr Hanlon was recorded offering to share sensitive government data with irrigation industry groups.

The report said the Hanlon-led group met by teleconference "on at least four occasions", resulting in "a potential loss of confidence in the professionalism and even-handedness of Department of Primary Industries, and therefore the wider NSW public service".

Sue Higginson, chief executive of the NSW Environmental Defender's Office, welcomed the report's finding that the water industry needed a complete overhaul to achieve independence, transparency and effective compliance.

"As hard as it is for many to accept, the science is clear," Ms Higginson said. "If we don't change the way we manage the Murray Darling ecosystem, prioritising healthy environmental flows, the future is grim for all who rely on the system.

"[T]hose who were charged with the responsibility of fixing the problem in the public interest have made things worse and it is a serious issue that it has taken a trial by media to reveal this," she said.

'Fox in charge'

Labor's Luke Foley, the opposition leader, said "anyone but a National" MP should be in charge of water.

"This is deliberate industrial-scale theft of water," Mr Foley said. "At the very least, you have to say these National Party characters were prepared to look the other way."

"A great Australian river is being killed on this government's watch," he said.

Jeremy Buckingham, the NSW Greens water spokesman, said the report was "profoundly damning" and the party would seek to move for a Matter of Public Importance debate on Tuesday and call for the 3150 documents supplied to the Matthews inquiry to be handed to Parliament.

"The National Party should be permanently stripped from holding the water portfolio," Mr Buckingham said.

"We cannot have the fox in charge of the henhouse, especially when National Party donors are getting favourable treatment by ministers, MPs and senior public servants."

With James Robertson