Justice secretary says contingencies in place as he confirms private security company G4S is to run Birmingham prison

The justice secretary, Kenneth Clarke, has confirmed that he is willing to call in the army should "serious trouble" erupt over his decision that the private security company, G4S, should run Birmingham prison – making it the first public sector jail to be privatised.

"We have to be prepared should anything go wrong," he told MPs.

The Prison Officers' Association (POA) said it would not rule out industrial action in protest at the decision, despite the fact that such action may be illegal.

Clarke said the military contingency plans, involving up to 3,000 trained regular soldiers, were needed because industrial action involving prisons "can rapidly become far worse than an ordinary strike".

The justice secretary told MPs: "Nobody is contemplating a military takeover of a prison; the governor will still be in charge. But it is only proper that we have made military preparations that would be required if serious trouble erupts."

The justice secretary also announced that G4S is to run a new "supersized" prison with 1,600 inmates next to the existing Featherstone prison at Wolverhampton. A third prison, Buckley Hall, at Rochdale, will remain in the public sector.

The 752 staff at Birmingham were told at noon that G4S will take over the prison in October.

About 250 prison officers, a third of the staff, immediately walked out. They held a short meeting outside the prison before branch officials asked them to return to work.

Clarke could not reassure them that they would not face redundancies. Instead he hoped they may find jobs at the new Featherstone prison, which is due to open next April.

The POA has a mandate from its members to take industrial action if any existing public sector prison is taken over by the private sector.

The decision will bring the number of private prisons in England and Wales to 13 out of the 140 existing jails, with G4S running six of them. The contracts will run for an initial 14 years with the option to renew for a further seven years.

The decision to "market test" Birmingham – formerly Winson Green, which has 1,450 inmates and is one of the largest in Britain – was taken by Jack Straw when he was justice secretary after it was branded a "failing prison".

Clarke said staff at Birmingham had made "considerable efforts" and that the public sector bid, which cost £2m to prepare, had been of a good quality. "But this is an objective process and the private sector bid was better and less costly," he said.

The justice secretary also announced that private sector company Serco would continue to run Doncaster prison, but that 10% of the contract will now be on a "payment by results" basis.

He also confirmed that a fifth jail, Wellingborough, had been withdrawn from the competition process because its 1960s buildings were in such a poor state it needs massive capital investment to remain in use.

During his Commons statement Clarke repeatedly told MPs that the military contingency plans were necessary "should anybody be so foolish as to go into industrial action".

It is believed that up to 3,000 regular troops based at the army's military glasshouse at Colchester and elements of the RAF regiment have been trained in control and restraint techniques and jailcraft such as how to lock down wings and move inmates safely around a jail in preparation for a POA dispute.

The POA held a successful ballot in favour of industrial action two years ago when the market test of Birmingham was announced by Straw.

Colin Moses, the POA chairman, said earlier this week that mandate still stood. It is expected that the union will ask its branches to hold a gate meeting tomorrow when their shifts start to decide what action they should take.

The only POA national strike happened in August 2007, when 90% of prison officers walked out for 12 hours, causing chaos in prisons. The action was ended only by a court injunction, which could have led to the union's assets being seized and its officials jailed.

A reserve power putting a legal ban on prison officers taking industrial action was reimposed by Straw in 2008.

Clarke told the Commons the changes would deliver savings of £21m for the three existing prisons over the next four years and deliver the new Featherstone 2 prison £31m cheaper than originally planned. He said "cumulative savings over the lifetime of the contracts for the three existing prisons are very impressive at £216m".

He added: "This process shows that competition can deliver innovation, efficiency and better value for money for the taxpayer, but also that it can do so without compromising standards."

The Prison Governors Association said it was dismayed by the Birmingham decision. It also raised concerns that the former director general of the prison service, Phil Wheatley, was now an adviser to G4S. "This is a decision which is unprecedented and will have a resounding effect on the prison service."

Steve Gillan, general secretary of the POA, said: "This is a disgraceful decision. Prisons should not be run for the benefit of shareholders nor for profit. The state has a duty to those imprisoned by the criminal justice system and this coalition government has betrayed loyal public sector workers for their friends in the private sector."

The POA has already launched a judicial review regarding Wheatley's employment by G4S.

Moses added: "Both a Labour government and now this coalition government have demonstrated their love affair with the private sector. This decision is wrong and immoral. The POA will continue with its long campaign against private prisons."