Australia's patchwork of small local councils is threatening urban liveability, according to the independent infrastructure adviser.

Infrastructure Australia has encouraged the Federal Government to reward states with money if they can simplify planning processes, in a 134-page report released on Friday.

The Future Cities research found "the large number of small local councils in many of our major cities has resulted in cases of fragmented governance, and disjointed infrastructure and service delivery".

CEO Philip Davies identified the Greater Sydney Commission — which has responsibility for city-wide planning — and the Brisbane City Council, the largest council in the southern hemisphere, as arrangements allowing for better long-term infrastructure planning.

"We've got four of the world's top 10 most-liveable cities in Australia," he said.

"However we also know that if we don't get the planning right, we won't have the most liveable cities."

The report predicted what Sydney and Melbourne would look like in the 2040s under low, medium and high-density development.

It concluded the low density scenario — the likely outcome from an unplanned or uncoordinated approach — made both cities less liveable, with strain on infrastructure and poorer access to services.

Council crunch already underway

Former Victorian Premier Jeff Kennett cut the number of council areas in his state by almost two thirds in the 1990s.

Similar attempts have been made elsewhere since then, most recently in Western Australia and New South Wales, but both were aborted before they were completed.

The Federal Government is already rolling out "city deals" which bring local, state and federal governments together in exchange for federal infrastructure investment in Townsville, Launceston, Darwin, Hobart and Geelong.

Local planning reform has been announced as part of the Hobart deal, but such an arrangement had been discussed by Hobart councils prior to the federal offer.

An Infrastructure Australia map shows what Sydney might look like in three decades. ( Supplied: Infrastructure Australia )

Infrastructure Australia argues the Federal Government needs to introduce a scheme where funding is given in exchange for streamlined planning.

"All the Federal Government has as a lever is money, and then it needs to back that up with help in getting the right policies in place," Mr Davies said.

Eamon Waterford, acting CEO of independent group Committee for Sydney, said "there's always going to be tension between different levels of government" but he believed the Greater Sydney Commission was working.

"Local government does a really good job but they're not resourced or expected to look at the bigger issues about where a train line goes, or where a new freeway goes, or where a new hospital goes, although they have huge implications for their area," he said.