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Corrections Minister Judith Collins is floating the idea of prisoners building their own cells from shipping containers.
Opponents say the proposal is inhumane.
The prison population is continuing to swell, with 700 added to the muster this year, and tougher sentencing is worsening the problem.
Measures such as double-bunking are being implemented.
"We will not have the capacity by the beginning of next year to house all the prisoners that we will have," Collins said.
She has asked the Corrections Department to consider the proposal, which she described as "a great idea" and "a lot better than being locked up all day in a cell".
The container cells would "be spartan but humane and clean" and prisoners could help build them.
"We're quite keen to have prisoners learning useful construction skills and helping to build their own environment."
Rethinking Crime and Punishment director Kim Workman told the newspaper the idea of putting prisoners in containers was inhumane.
"This is likely to create a considerable backlash. I think they are going one step too far with the idea of housing prisoners in containers," he said.
"I think it's a major breach of human rights and a contravention of the United Nations minimum rules for accommodating prisoners."
Prisoners could be asked to work but making their own cells was similar to asking a person on death row to build their gallows, he said.
"You can imagine how they would feel, building these atrocities and then being expected to live in them you might get a very negative reaction from prisoners.
"I think she is on the verge of creating a situation where there will be major riots and people will die."
Collins said the containers would provide a better standard of housing than some of the country's older prisons such as Auckland's Mt Eden and Wellington's Mt Crawford.
Using containers would mean prisoners did not have to be moved so far from families and it would mean less transporting of prisoners.
In crowded prisons, containers could be set up on adjacent areas.
"The previous government did not actually build enough space and bunks basically, and we've been left with this to deal with," Collins said.
The cost of building accommodation to the standard of the new Spring Hill prison in Meremere, south of Auckland, works out at about $643,000 per bed.
Using shipping containers, the cost is an estimated $380,000 per bed.
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