Finance Minister Bill English said he was confident that the prison would cost 10 per cent less than a public prison, and perform better than the public sector.
He said the Government considered shelving the prison altogether, given the financial climate and because the forecast for the prison muster for 2016 has dropped by about 3000 in the past three years.
But other factors in the decision were the age of older prisons including Mt Crawford, and the earthquake assessment work being done on all prisons including the ones in Canterbury.
However Mr English said he believed Wiri, to be built by Fletcher Construction, would be the last prison that the Government needed to build.
"This is an important milestone for one of the first major PPP projects in New Zealand," Mr English said.
"We are confident the new prison will reduce reoffending, improve public safety and help improve performance across the entire prison system.
"The contract will have strong performance incentives, ensuring we receive a superior service compared to publicly run prisons or we pay a lower price."
Corrections Minister Anne Tolley said Corrections was looking at closing Mt Crawford Prison.