Charles Clarke has signalled an increased role for the private sector in the building and management of "community" jails and other services as part of a large-scale reorganisation of the prison estate.
In his first detailed policy statement on the sector since becoming home secretary last December, Mr Clarke identified the need for prisoners to serve their sentences closer to their families and homes as a way of reducing reoffending.
There are wide variations across the country in the relationship between the number of prison places available locally and the numbers that are needed. Large swathes of the overcrowded prison estate are in urgent need of modernisation.
Mr Clarke said he envisaged the private sector playing its part in driving up standards and ensuring local prisons helped provide more integrated drug rehabilitation and job programmes aimed at helping offenders back into in the community.
Speaking to the Prison Reform Trust, Mr Clarke said he remained "personally committed to the creation of a vibrant mixed economy" with the National Offender Management Service having overarching responsibility for running the prison and probation services.
"In many areas the public sector's skill and expertise will deliver the continuous improvement we need. In other areas, competition is needed to stimulate the improvement," Mr Clarke said.
Details of the new building work that Mr Clarke might opt for, and the extent to which this might involve contracts under the private finance initiative, was likely to emerge from an internal review of the prison estate due to be completed by early next year, said a Home Office official.
GSL UK, one of the bigger companies involved in the prison sector, welcomed the speech as clear recognition that "the private sector will continue to have an important part to play".
The proposals for the establishment of "community prisons" to reduce reoffending and cut back on the record number of prisoners was also welcomed last night by the CBI.
Sir Digby Jones, director-general of the employers' body, said: "The incidence of reoffending increases alarmingly when a prisoner does not achieve employment on release from prison.
"A safer society and a more productive economy is the result of getting as many ex-prisoners as possible into the world of work, and this sounds like another way of working towards that goal," he added.
