An environment group has questioned why an irrigation-boosting dam project received a multi-million dollar grant through a government fund for cleaning up rivers and lakes.

Forest and Bird has also accused Environment Minister Nick Smith of holding a conflict of interest in signing off on the $7 million grant for the Waimea dam, which would be built in an area bordering his electorate, and which Smith has advocated.

But Smith has rejected the group's claims, arguing the water storage scheme would improve the health of the Waimea River while saving the local economy $1 billion, and has rubbished allegations of a personal conflict.

The $82 million project, proposed for the Lee Valley in the Tasman district, was awarded the largest share of $44 million just allocated to 33 projects through the Freshwater Improvement Fund, administered by the Ministry for the Environment.

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Its advocates say a storage dam would enhance the river by speeding up flow rates through the Waimea Plains, protect aquifers from the risk of saltwater intrusion, boost water security for households and users, and support local productivity with extra capacity for irrigation.

Tasman District Council has already locked in for $25 million for the project, with further funding potentially coming from Nelson City Council, Waimea Irrigators Ltd and state-owned Crown Irrigation Investments Ltd.

Its freshwater fund grant was awarded after being reviewed against a set of criteria by an independent panel, with Smith making the final decision.

Forest and Bird chief executive Kevin Hague questioned why 16 per cent of the fund's latest grants - making the project the single largest awarded so far - had gone to what he argued was a taxpayer-funded subsidy for irrigation.

"The Waimea dam will block the headwaters of a beautiful river, in order to augment the flow of an over-allocated river downstream," Hague said.

"Rather than the Tasman District Council setting the allowed water take at a sustainable level, this project will simply remove water from one area to boost supply in another.

"The dam will allow more intensive horticulture which means more nitrates and worse outcomes for water quality in the area.

Environment Minister Nick Smith has rejected any notion of a conflict of interest. Photo / File
Environment Minister Nick Smith has rejected any notion of a conflict of interest. Photo / File

"That's not fixing a problem, that's making it worse."

Hague said because Smith had supported the project, and it would benefit his electorate, he could have delegated decision-making to another minister.

"This is a serious conflict of interest which reflects poorly on the minister's willingness to do his job of protecting New Zealand's rivers and natural environment," he said.

"It is very hard to see how this grant is anything other than an electorate bribe.

"This public money should be going toward cleaning up the mess that intensive land use is largely responsible for."

Responding to the criticisms, Smith said higher minimum flow rates would improve the river's ecological health, allow it to be used recreationally, and help prevent summer build-ups of algae in its lower reaches.

"Very significantly, converting 2000ha of dry land farming to crops like apples and grapes actually reduces the amount of nitrates," he said.

"Forest and Bird and the Green Party repeatedly think that irrigation automatically means increased levels of nutrients and pollution.

"I think their criticisms just highlight the simplistic view that both Forest and Bird and some political parties are taking to the debate around water."

Without the dam, and with government requirements to meet minimum flow levels, the consequences could be "devastating" for the local horticultural economy, with one independent analysis showing a potential billion-dollar hit, Smith said.

The decision to award the project a grant reflected a high degree of confidence of the water quality benefits it would bring, based on the scientific and resource consenting work behind it, he said.

Smith argued the funding shouldn't be seen in isolation from other big government spends on freshwater improvement - including $230 million for Waikato River, $70 million for Lake Taupo and $40 million for the Rotorua lakes - and wasn't the only water storage project that won a grant in the pool.

"This Tasman project is partly beneficial to my electorate, but also partly next door - I think it's a long bow [to draw] to suggest that somehow this project has been favoured because part of it is in my constituency," he said.

"There is no practice in New Zealand - whether you're a minister of education, or environment, or any other portfolio - of people saying you can't make decisions that have some impact on your community.

"Ironically, there was only one region in New Zealand that applied and is not receiving any funding, and that is Nelson."