Amendments would impose cost-benefit analysis on projects worth more than $100m, and prevent transfer of $3.5bn to the new fund

The Senate has refused to allow the Abbott government to proceed with its desired model for an “asset recycling” scheme, insisting on key changes including greater powers to block incentive payments and removing one of the funding sources.

On Friday the Senate voted for amendments that would prevent the transfer of $3.5bn from the Education Investment Fund to the infrastructure-incentive pool. The government argued blocking this transfer would make the fund unviable.

The government wants to provide incentive payments to state and territory governments that sell assets and use the proceeds to build “nation-building infrastructure”. The top-up provided by the federal government will be 15%.

The Senate passed a modified version of the government’s legislation on Thursday. When the bill returned to the House of Representatives for approval, the government used its majority to reject key amendments.

The legislation came back to the Senate on Friday where the government leader, Eric Abetz, failed to win support for a motion to back away from the contentious amendments. Motoring Enthusiast Ricky Muir and the three Palmer United party senators sided with Labor and the Greens to defeat Abetz’s motion that the Senate not insist on the changes.

One of the Labor amendments would ensure those infrastructure projects worth more than $100m were assessed by Infrastructure Australia with a published cost-benefit analysis.

Abetz said the asset recycling legislation was an “essential part” of the government’s agenda to build the infrastructure of the 21st century and create jobs, and it was important that the fund be able to operate without the particular impediments proposed by the Senate.

But the Labor senator Doug Cameron said the requirement for a proper cost-benefit analysis was in line with previous Coalition rhetoric about the need for checks and balances on the spending of billions of dollars in public money.

The government was also angry about the removal of clauses that would have allowed for the transfer of $3.5bn from the Education Investment Fund to the Asset Recycling Fund. According to a government statement presented to the house, this amendment would prevent “the transfer of necessary assets from the Education Investment Fund, without which the Asset Recycling Fund will not be viable for the purposes for which it is to be established”.

Another change made by the Senate would ensure the government could not grant particular incentive payments without using a legislative instrument. This effectively meant the Senate could “disallow” any particular incentive.

The disallowance procedure was rejected by the government in the House of Representatives.

“The amendments would create a disruptive and unnecessary process that would mean the states would have no confidence that the Commonwealth would make payments in accordance with already signed National Partnership Agreements,” the government document said. “The proposal to use disallowance mechanisms against payments to the states would block or delay funding from the Asset Recycling Fund for critical infrastructure.”

Labor’s transport spokesman, Anthony Albanese, earlier said the upper house would not be able to “stop states selling a hospital to build a road” but it would be able to prevent an incentive payment being made for such a transaction.

“What it doesn’t allow is an open-slather attitude towards privatisation with no accountability,” he said.

The government criticised the amendments during the Senate debate on Thursday. The finance minister, Mathias Cormann, said: “These amendments only add red tape with no additional benefit. These additional amendments are about increasing duplication.”

The Senate passed a Greens amendment opposing the use of the fund for privatisation of essential services. The Greens also secured Senate support to add the words “encouraging privatisation” to the original name of the legislation, the asset recycling fund bill.

The Greens senator Scott Ludlam said the bill “would create a toll-roads slush fund at the expense of investment in public transport, and at the expense of revenue-generating publicly owned state assets”.

“State governments should not be bribed with incentive payments to sell off public assets in public hands and the Greens will fight this move all the way,” Ludlam said.