National party leader Terry Redman has proposed using the $1bn Royalties for Regions fund to provide services for 180 of the state’s 275 remote communities

Remote Indigenous communities in Western Australia may be saved from closure by mining royalties, if the cabinet agrees to a proposal from the National party leader.

Terry Redman, who is also regional development minister, told the West Australian on Wednesday he would be prepared to use the $1bn Royalties For Regions fund, established in a deal with the Nationals in 2008, to provide municipal services for 180 of the state’s 275 remote Indigenous communities.

In November, premier Colin Barnett announced plans to close up to 150 remote communities after the federal government announced the withdrawal of funding for municipal services, saying the state could not afford to service them.

The state received a $90m one-off payment in exchange for the federal government’s withdrawal, which will take effect in two years.

That funding was included as revenue in the state’s mid-year economic and fiscal outlook, but no additional spending has been earmarked.

Between 12,000 and 15,000 people live in WA’s remote Indigenous communities, 80% of which are in the Kimberley.

Redman said the Royalties for Regions fund could be used to support remote communities, but it would need to be tied to better outcomes for Indigenous people.

“I don’t think anyone has got too much pride in the outcomes in remote Indigenous communities over the past two or three decades,” he said.

“If we’re going to put the resources into it, then it needs to be something that supports reform, whether that be housing, education, health services.”

The proposal is being considered by the Aboriginal affairs cabinet subcommittee, which Redman sits on along with Barnett and Aboriginal affairs minister Peter Collier.

If the subcommittee approves the proposal, it will be put to cabinet for consideration in the 2015-16 state budget.

It’s understood the committee will have a more substantive proposal in late January.

The opposition Aboriginal affairs spokesman, Ben Wyatt, told Guardian Australia the proposal was “encouraging” and would have Labor’s support, provided it was done in consultation with remote communities and offered a fair deal.

“We’re hoping that Redman manages to talk to Barnett, who seems to think that it’s still 1963 and this is how we deal with Aboriginal affairs,” Wyatt said.

Wyatt said Barnett’s suggestion that “unsustainable” communities would have to be closed was not a viable option and would put pressure on regional centres such as Broome and Fitzroy Crossing.

Peter Yu, a Yawuru man from Broome and former Kimberley Land Council chief executive, who has been working with remote communities for almost 40 years, said Redman “ought to be congratulated” for taking charge of the issue.

He said closing communities would be a “disaster”, second only to the mass displacement of Indigenous people after equal wages were introduced in 1968. That resulted in people, including Yu himself, congregating in regional towns after being pushed off pastoral leases, in what he described as “an internal refugee situation”.

Yu, who is now chairman of the North Australian Indigenous Land and Sea Management Alliance, said moving Indigenous communities from the Department of Aboriginal Affairs to Redman’s Department of Regional Development was a “significant change of terms for the policy debate”.

He said Indigenous people had so far been left out of discussions about the development of northern WA, and Redman’s move to take ownership of the issue should be followed by an inclusive regional development policy which recognised the rights, interests and opportunities for Aboriginal people.

“Aboriginal issues have been mismanaged to the point that it’s seen as an afterthought in policy,” he said. “This is a mainstream issue. It’s not an inverted commas ‘Aboriginal issue’.”

Yu said the future of remote communities should be determined in an Aboriginal-led, evidence based discussion, following an audit of all communities. The last audit, in 2009, found just 7% of communities passed the base level requirements for infrastructure and services.

The state government has estimated it would cost between $2bn and $10bn to fund a “minimum level” of municipal services to all 274 remote communities over 10 years.

Guardian Australia asked Redman’s office for details of the proposal and whether he was confident it would be approved by cabinet.

Redman did not answer directly, but said he would “be driving a proposal through the 2015-16 state budget process”.

In a statement, he said: “I am supportive of providing Royalties for Regions funding to this issue but any funding will be linked to a clear reform process supported by Aboriginal leaders.”