The nation's top infrastructure chief has admitted the Commonwealth's $10 billion rail-building plan - which is money that will need to be borrowed - will mainly be handed to states as cash grants, undermining the Turnbull government's strategy of avoiding "bad debt" that threatens the AAA rating.

Mike Mrdak, secretary of the Department of Infrastructure and Regional Development, also admitted that despite the large size of the funding plan no decisions have been made where the money will be spent.

"That's detail still to be established," Mr Mrdak told a Senate estimates hearing.

"We'll be discussing with the states and territories their rail-planning work over the coming months and then establish an assessment process once we've completed that."

The funding pledge - which is part of the government's overall claimed $75 billion infrastructure spending promise - was announced in the budget as a "National Rail Program" without almost no detail.

The remarks have highlighted the potential risks associated with one of the largest tranches of infrastructure spending in this year's budget, as well as the fact that most responsibility for new work still rests with the states.

If the money is largely delivered in the form of grants, or direct payments, the outflow will land on the Commonwealth's balance sheet as spending, worsening the deficit.

By contrast, there have been calls within the government led by figures such as Angus Taylor, to avoid direct payments in favour of actual investments in new projects, either through equity stakes or via concessional loans.

The latter approach would provide the Commonwealth with an "asset" that it could use to offset the increased debt required to raise the funding.

This would buttress Treasurer Scott Morrison's emphasis in the budget on distinguishing between "good and bad" debt, which has helped avoid a threatened AAA credit downgrade.

Under questioning from Labor Senator Malarndirri McCarthy, Mr Mrdak also confirmed that it was not yet clear how that money would be spent, but indicated that it would mainly be in the form of direct payments to the states.

"I think it's envisaged that it would be grant funding, I believe, but yet to be settled," he said.

"That will somewhat depend on the projects coming forward. Some of them may be amenable to investments through equity or concessional loans.

"So it's not clear at this stage how that will operate."

Mr Mrdak confirmed that none of the money is slated to be spent in the next two years, with $600 million in direct grant payments scheduled for 2019-20 and 2020-21.

"The rest of the funding hasn't been profiled," he said.

Shadow infrastructure minister Anthony Albanese said the estimates remarks were a sign the national rail program is "just another Coalition con".

"Officials confirmed no money would be released from the fund over the next two years," he said on Tuesday.

"The bureaucrats were also unable to explain how projects would qualify for funding, who would conduct eligibility assessments or whether the money would be disbursed via direct grants to the states or concessional loan."