Probation chiefs have accused the justice secretary, Chris Grayling, of dismantling the probation service as he confirmed that the public sector would be barred from bidding for the payment-by-results contracts to provide his radical rehabilitation plan for prisoners leaving jail.

Grayling is expected to confirm in a Commons statement on Thursday that the public probation service is to be reduced to a smaller specialist role supervising only the 30% of offenders regarded as high-risk with the private and voluntary sectors taking over 70% of the existing probation work with 240,000 offenders each year.

The existing 35 local probation trusts are to be scrapped and replaced by a single, smaller, national probation service. They will also be replaced by 21 "government-owned companies" covering England and Wales that will invite bids from the private and voluntary sectors, including G4S and Serco, to take over existing probation work as well as the new rehabilitation programme for released short-sentenced prisoners. The plans are to be in place by the next general election in 2015.

The justice secretary told the BBC a shortage of new money to finance his new initiative, under which 50,000 short-sentence prisoners will face a new statutory 12-month period of supervision and rehabilitation on release, would be overcome by doing more with less.

"It is what we are doing across the public sector. When only 25% of probation officers' time is spent working with offenders there has got to be room for efficiency in the system. There will be a smaller probation service. Many of those who currently work for probation will transfer to the private and voluntary sector," said Grayling.

Sarah Billiald of the Probation Chiefs Association accused Grayling of dismantling the probation service at the moment when he needs them most: "Yesterday in the Queen's speech the government announced an ambitious set of proposals for the rehabilitation of offenders. Today it has announced the dismantling of the very bodies who have the experience, professionalism and track record of delivering this work: probation trusts."

She said the government's argument for the "almost total outsourcing of probation is the need to make reforms affordable and yet given that probation has a track record of delivering while driving out 20% of efficiencies over the past four years this doesn't stack up."

The probation chiefs said the decision to ban probation trusts from bidding for the "untried and untested" payment-by-results contracts and the high level of investment required meant that all but the largest players would be ruled out.

Ministry of Justice officials say the plan for a radical extension of post-release supervision – which will include preventing released prisoners moving to a different area and subjecting them to compulsory tests for class B drugs including cannabis – represent the most significant change to short custodial sentences in a decade.

The change means that all 85,000 prisoners in England and Wales will face a period of at least 12 months of statutory supervision and rehabilitation when they leave prison for the first time. Those on short sentences currently leave prison without any supervision at all and only a £47 release grant in their pocket.

This latest phase of the government's "rehabilitation revolution" will apply to all offenders sent to prison for under two years, including petty criminals jailed just for a few days for offences such as non-payment of a fine.

Grayling's offender rehabilitation bill will introduce powers to require released offenders to undergo compulsory drug tests for cannabis for the first time while they are living in the community under supervision. Those who test positive will face penalties and be required to attend appointments with drug treatment services.

While they are in the community, offenders, who will probably have to wear a new generation of GPS satellite tracking tags, will have to comply with a programme of support on housing, employment, training and alcohol and drug treatment. There will be a new emphasis on using reformed offenders to act as mentors to those newly released from prison. Those who fail to comply or misbehave will face being recalled to jail.

Short-sentence prisoners serving 12 months or less currently have the highest reconviction rate, with 58% found guilty of a fresh offence within a year. Under the MoJ plans the extended period of compulsory supervision and rehabilitation will also apply to a further 15,000 prisoners a year who serve sentences between 12 months and two years and are already subject to shorter periods of being released on licence.

The current 130 prisons in England and Wales are to be reorganised, with more than half – 70 – moving into a national network of resettlement prisons. Offenders will be released into the local area where their rehab and supervision programme is to take place and will be banned from moving to other parts of the country without permission.

Grayling said: "Tackling our stubbornly high reoffending rates has dogged successive governments for decades. These reforms represent a golden opportunity to turn the tide and put a stopper in the revolving door of the justice system.

"It is simply not good enough that we spend £4bn a year on prisons and probation, and yet make no real dent in the appetite of offenders to commit more crime. It is little wonder when many of our most prolific criminals leave prison totally unsupervised in the community."

A G4S spokesman said the company was well placed to deliver the kind of innovations that the government was looking at. He claimed its long history of working with offenders in partnership with the public and voluntary sectors meant G4S had developed substantial expertise in the area.

Max Chambers of the centre-right thinktank Policy Exchange said there would be inevitable protests from "vested interests who resist change, including many who oppose this introduction of a profit motive for providers. But it's hard to argue with the idea of rewarding firms who have success in helping chaotic, difficult people to find work, keep a home, get clean and stay on the straight and narrow."

Prison reform groups voiced concerns. Juliet Lyon of the Prison Reform Trust said rehabilitation on release made sense but there was a danger that an inflexible approach to those who breach the conditions of their release could refill the prisons.

Andrew Neilson of the Howard League for Penal Reform also predicted that many would end up behind bars saying the extra support would do little more than repair the damage that prison had caused by leaving them without a job, home or access to their family.