Prison capacity is being limited by union officers, Finance Minister Bill English said yesterday.
Parliament is considering legislation to let private operators run prisons.
Mr English said the Corrections Department was going to need more prisons, and it was one of the first areas where public private partnerships could be used.
"We've asked Corrections to look at alternatives for delivering extra capacity - including a new prison. We're happy to proceed with that if the case stacks up. We expect to be in a position to make decisions about that early next year."
Mr English said the Government would use private partnerships only if that provided a better deal. He was confident the public would not have a problem with the idea or other private provisions.
Asked if the public was more comfortable with the idea of the private sector being involved in building structures rather than delivering services, Mr English hit out at members of the Corrections Association.
The association is taking Corrections to the Employment Court arguing that the commissioning of double bunked prison cells breaches guards' collective agreement.
"I think the public would be more concerned about the current arrangements where effectively the corrections union decides how many prisoners we are allowed to lock up after they've been sentenced," Mr English said.
"That's quite unsatisfactory and I think the idea of private management of prisons is very well established around the world."
More than 8000 people are in New Zealand's prisons.
The committee considering the Corrections (Contract Management of Prisons Amendment) Bill has been told state prisons are cheaper to run and have had fewer escapes than Auckland Central Remand Prison did when it was run privately for five years.
"We'd only go down the private route if we thought we were going to get a more cost-effective service," Mr English said. "So over the next 12 months or so we'll see whether the publicly funded and run prisons can give us better management of the prisons and less escapes, if the other arrangements look like they will give us a worse service then we won't go with them."
Labour's law and order spokesman Clayton Cosgrove said the jury was still out on whether private prisons offered maximum value for taxpayers' money.