David Cameron’s promise to spend millions on bulldozing and rebuilding sink estates as a key part of his prime ministerial legacy appeared to unravel last night as it emerged that the small amount of money set aside for the project can only be accessed by private developers in the form of loans.

To great fanfare, the prime minister announced his intention in January to potentially tear down 100 of the UK’s worst estates to tackle drug abuse and gang culture. The modest size of the £140m “fund” set aside by Cameron to meet costs was widely questioned at the time, but Downing Street insisted that the redevelopment programme would reverse decades of neglect.

The housing developments being targeted reportedly include the Winstanley estate in Wandsworth, south London, the Lower Falinge estate in Rochdale, Greater Manchester, and Broadwater Farm in Tottenham, north London.

Now the Observer has learned that the £140m is only available in loan form to private sector organisations who come forward to regenerate stricken areas. A statement quietly released by the Department for Communities and Local Governmentin February admitted: “£140m of loan funding has been set aside by government, to be used as a springboard for partnership and joint venture arrangements, with the active involvement of communities.”

A spokesman said the rate of interest on the loans to private companies would vary “scheme by scheme”. The application process, more than a month since the announcement, has yet to be opened to interested parties.

The revelation will be an embarrassment for the prime minister, who claimed on the BBC’s Andrew Marr Show at the time that “in the worst estates … you’re confronted by concrete slabs dropped from on high, brutal high-rise towers and dark alleyways that are a gift to criminals and drug dealers”.

Promising to transform the worst estates, Cameron added: “For some, this will mean knocking them down and starting again. For others, it might mean changes to layout, upgrading facilities and improving road and transport links.”

His announcement on the regeneration of sink estates was widely seen as an attempt to claim the centre ground as Jeremy Corbyn’s Labour party moved to the left. The redevelopment programme is to be overseen by Michael Heseltine, who helped to transform the Liverpool and London docks in the 1980s. However, in the light of revelation about the reality of the funding, John Healey MP, the shadow secretary of state for housing and planning, accused the prime minister of making “hollow announcements to make headlines”.

He said: “After five years of Tory failure on housing, those living on estates around the country need investment in new homes and estate regeneration – not an announcement of a new fund that is quietly downgraded when it is hoped no one will notice.”

A DCLG spokesman said the loan status of money set aside for regeneration had been laid out in the autumn statement, ahead of Cameron’s claim in a Sunday newspaper and on the BBC to have put aside a “fund” for the initiative.He said: “We’re determined to kick-start the regeneration of council estates to provide high quality homes to benefit thousands of people.

“The autumn statement made absolutely clear that the government is providing loan funding for council estate regeneration projects.

“The £140m will be used to lever in additional funding from local authorities, housing associations and private investment. High up-front costs and long timescales for development mean regeneration schemes can become stalled because upfront finance is unavailable. These low-risk loans will help remove blockages and speed up processes to transform estates.”