Auckland Prison's maximum security wing is to be completely rebuilt under a Public Private Partnership (PPP).
Corrections Minister Anne Tolley said the new wing at Paremoremo was a significant infrastructure project and was scheduled to open in mid-2017.
The wing would be designed, built, financed and maintained under the partnership.
Corrections would continue to have full operational control for the custody and care of inmates, she said.
Corrections will sign an estimated 25-year contract with the successful consortium, which will include a series of key performance indicators.
Under the partnership, payments can be withheld if targets were not met, Mrs Tolley said.
The new wing will be built on prison land alongside the existing facility, which will continue to operate until the new building is complete.
Capacity would remain at 260 beds, with work on the new facility scheduled to begin by mid-2015.
"The maximum security wing at Auckland Prison is the only one of its kind in the country, and it houses New Zealand's most difficult and dangerous prisoners, as well as a number of prisoners with high and complex needs," Mrs Tolley said.
The wing is 45-years-old and expensive to maintain, she said.
"While it is still very secure, it doesn't provide staff with the best environment to deal with challenging prisoners, or to deliver specialist rehabilitation or mental health services.
"The new building will house a mental health unit for prisoners with severe to moderate needs, which will provide care to offenders who currently have to be transferred off-site. This, in turn, will ease pressure on the Mason Clinic."
The PPP rebuild would also ensure Corrections were getting value for money for taxpayers, Mrs Tolley said.
The rebuilt wing would also improve conditions for staff to work with prisoners to lower their security classification, so they can be transferred to a facility with greater rehabilitation opportunities, she said.
Corrections would now seek expressions of interest from consortia wishing to take part in the partnership, Mrs Tolley said.
Private prison operator Serco racked up $300,000 in fines, including penalties for an escaped inmate, in its first year in business operating the Mt Eden Corrections Facility.
The partnership has since improved, with the Auckland prison meeting 34 of its 37 performance targets the following year.
Labour's Corrections spokesperson Jacinda Ardern said while the wing needed upgrading, the partnership must show value for taxpayer money.
"It is good to see Ms Tolley acknowledging that improvements need to be made around staff safety and better mental health services for prisoners.
"However Ms Tolley now needs to demonstrate exactly how being beholden to a private company for the next 25 years represents good value for New Zealand taxpayers.''
The Mt Eden PPP showed the partnerships didn't always work, with prisoner escapes, high numbers of officer assaults, late releases, numerous reporting failures, and staff training and retention problems, Ms Ardern said.
"Over the last few weeks I have visited a range of corrections facilities around the country. We are absolutely capable of building an innovative state-of-the-art wing.
"It's up to Ms Tolley to demonstrate why we should want to be venturing down this disastrous privatisation path again.''