I don't think that it would ever work, but an idea may be something of a player draft. All players are eligible to play for the Club of their choice in the Colts competition (this would allow young players to play close to home/work/school etc).
At age 20 (when they finish Colts and graduate to Grade), all players interested in committing to playing grade are signed to nominal paying contracts by the Sydney Rugby Union for a period of two seasons. These players go into a draft system, similar to the NBA/AFL Draft. Club would then need to top up contracts, based on appearances in first grade/second grade, as well as covering travel allowances and possibly rental assistance.
If a player pulls out of the contract before the two year, he is unable to be registered for a premiership club for a further two seasons.
All Clubs would be able to contract up to five players before the draft to ensure that some talent stays with the Club, as they are the developers. Any player who refuses to sign the Colts-Grade pathway contract may not be registered with a Premiership Club for a term of two playing seasons (to stop players not entering the draft and signing with their club afterwards), unless there are mitigating circumstances.
Colts aged players from QLD/Vic/SA/WA would need to nominate for the draft in order to play for premiership clubs.
For example, if we take the Eastwood 1st XV Colts as all leaving to play Grade next year, Eastwood could contract Blake Sutton, Tannous Ferris, Jackson Larkin, Kyle Shewan and Wes Sefuiva, but all other Colts would be forced to enter the draft.
Just a thought, would love to hear your feedback.