How will it destroy NSW club Rugby? The clubs aren't going to disappear, they'll still have their own competition, the only difference is that it will have to take a back seat to the national one... and regardless of whether you think Tooheys New Cup standard has improved a lot in the last 2 years, it is still NO WHERE NEAR the standard of the Super 14 or New Zealands NPC... The other problem of course is that the level of public interest in NSW of Qld club rugby is nothing short of laughable, so pathetically low that the Tooheys New GF generally has about as many people as the average Souths Game in the NRL. With a National comp, the ARU has a chance to also garner more public interest in Australian rugby outside the big teams, the money produced from which could be further used to enhance the grass roots.
As for the problems of player saturation, well what will happen of course with situations like yours is that if one club has too many talented players that they can't find a starting sport for all of them, those players will probably be lured to other clubs.