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The justice secretary has announced that a new contract awarded to a private company to run a prison includes a payment by results condition.
Ken Clarke came to the Commons today to announce HMP Birmingham and Featherstone 2 will be run by G4S Plc, while HMP Doncaster will be run by Serco Plc.
HMP Buckley Hall will be run HM Prison Service, he told MPs.
The new contracts will be effective from October 2011 for HMP Birmingham, Buckley Hall and Doncaster, and April 2012 for Featherstone 2.
Clarke said that over the spending review period, the new contracts will deliver savings of over £21m for the three existing prisons.
"In the same period, the new prison Featherstone 2 will be delivered at £31m lower than the costs originally approved by the previous government," he said.
"Cumulative savings over the lifetime of the contracts for the three existing prisons are very impressive at £216m."
The justice secretary said the contract award for HMP Doncaster will include "an element of payment by results in reducing reoffending".
"Payment by results is central to our rehabilitation reform plans because it means that we can concentrate on paying for what works to reduce reoffending," Clarke said.
"The current system funds services, not outcomes.
"Providers of services face few consequences if what they offer doesn't succeed in cutting offending and little reward if it does.
"Payment by results looks to change this by rewarding performance against the outcomes specified in a contract.
"The contract for HMP Doncaster is an important first step towards fulfilling this commitment.
"This approach is a win-win. It translates to savings for the taxpayer, lower reoffending rates and a return for the service provider that grows in proportion to their performance."
Shadow justice secretary Sadiq Khan welcomed the pilot scheme of payment by results being part of the HMP Doncaster contract.
He said Labour had begun the process of improving the efficiency of prisons.
Clarke was asked whether the army will be used to cover for prison officers if they go on strike in response to the new private contracts.
"There always used to be contingency plans because governments have to have them," he said.
"Unfortunately if people are so unwise as to go in to industrial action in prisons it can rapidly become far worse than a normal strike because you can have violence and disorder amongst the prisoners in prison."
He said it is prudent to have the army "prepared" in case they are needed.
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