The prime minister, Tony Abbott, has indicated he may reverse his decision to deny Victoria $3bn of federal money intended for the controversial East West Link road.

Abbott said the money could go to another project of “national significance” put forward by the Victorian government. The prime minister had previously ruled out releasing the promised funding to Victoria if the East West Link contract, which was signed by the previous Coalition government, was broken.

The state Labor government has vowed to tear up the contract after releasing the full business case for the two-stage tunnel project that showed Victoria would receive just 45 cents for every dollar spent.

The combined stages of the road project, linking the eastern suburbs of Melbourne with the west of the city, would cost up to $18bn. The federal government had committed $3bn to the project, $1.5bn for each stage, before the full business case was released.

Abbott told radio station 3AW: “I am not going to rip off Victoria, I want to see the cranes in the sky and bulldozers on the ground in Victoria.”

“I’m happy to talk to [the Victorian premier, Daniel Andrews] about projects of national significance. What he can’t do is keep the East West money and spend it on whatever he likes. It’s got to be something the commonwealth believes to be important economic infrastructure of national significance.

“We are very happy to contribute to important economic infrastructure in Victoria, but we will make that decision and we won’t leave $1.5bn to be spent at will by a government that is in breach of its predecessor’s commitments.”

Abbott said the East West Link was a “vital project that must go ahead” because it would alleviate traffic congestion. By contrast, modelling in the road’s business case found that traffic would actually worsen on some of Melbourne’s busiest roads.

The prime minister also hit out at the Victorian government over reports that it may have to pay $1.1bn in compensation to contractors to ensure the road doesn’t go ahead.

“What government pays $1bn to not build a road? Now this is the midsummer of madness, to pay a billion dollars not to build a road is just insane,” Abbott said.

Andrews, speaking later on 3AW, said the East West Link was a “dud” project and that the government was committed to scrapping it.

He rejected the $1.1bn compensation figure, but would not rule out paying any compensation, contrary to Labor’s pre-election assurance that no money would need to be paid to contractors for lost potential profits.