The New South Wales Government has said it will allow a private operator to bid to run a medium-security jail on Sydney's north-western outskirts, while announcing that prisons that fail to cut reoffending rates will be put to competitive tender.

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Faced with a dramatic increase in prisoner numbers, the Government says it will put a tender out for the running of John Morony medium-security jail near Windsor.

"Prisons in NSW are thirsting for reform; you only have to pick up the newspapers, you only have to listen to talkback radio," Minister for Corrections David Elliott told reporters on Sunday.

Mr Elliot said another 1,100 beds would progressively be made available in the public system but there needed to be an improved performance across the system.

Prisons that did not slash reoffending rates would also be put to tender, he said.

"This about making sure the taxpayers of NSW get the best opportunity available when it comes to managing a prison."

Mr Elliot said it was not a vote of no confidence in the public sector, but rather "market testing".

"This clearly is an opportunity for us to sharpen the pencil, but also to make improvements that are urgently needed," he said.

Corrective Services Commissioner Peter Severin said the public sector would be bidding for the John Morony contract.

"This is an opportunity for positive change at the grassroots level, involving all management and staff," he said

A successful bidder will be announced in August.

Labor and the union representing prison guards were quick to criticise the push for more private participation in the state's jails, following the establishment of privately run jails in Junee and Parklea.

Government paying price for cutting costs, says Labor

A recent auditor-general's report found the state's prison system was operating at a 112 per cent occupancy rate, and found the Government needed better future planning.

"The Government is paying the price of cutting costs in our state's prisons," NSW Labor leader Luke Foley said.

"Perhaps (Premier Mike) Baird should start with a new minister rather than putting this in the too-hard basket."

The Public Service Association, the union representing prison offices, said further privatisation of prisons was "another short-sighted cash grab".

"Privately run prisons in New Zealand have been a debacle, with inmates setting up fight clubs and posting videos of their fights on social media," Mr McMahon said in a statement.

"There is no accountability or transparency.

The NSW Government announced that the operation of John Morony Correctional Centre would be opened to private tender. ( ABC News: Ursula Malone )

"We have been trying to work with the Baird Government in fixing the overcrowding crisis in our jails, but this is purely about selling off public assets to get their hands on more money."

The minister defended the push towards privately run prisons.

"We have existing privately run jails in Junee and Parklea very effectively. New Zealand, the United Kingdom, Queensland and Victoria all have privately run prisons.

"The unions shouldn't be surprised that we're talking to the private sector because this is something even the former Labor Government endorsed," Mr Elliot said.

"Unfortunately here in NSW, prisons are a growth industry."

Prisoner numbers increasing dramatically in NSW

Australian Bureau of Statistics data showed a marked increase in prisoner numbers in NSW between 2014 and 2015.

The number of adult prisoners increased by 12 per cent between 2014 and 2015, the largest of any state and territory.

The adult imprisonment rate was 200 prisoners per 100,000 people in 2015, up from 182 in 2014, according to the ABS.

Aboriginal and Torres Strait Islander prisoners comprised 24 per cent of the adult prisoner population.

Over half of all prisoners (55 per cent) had previously served time.