The new £170 million prison Glen Parva is to built using a private finance deal, the Government has said.
Justice minister Rory Stewart said the Treasury has given the go-ahead for a replacement for the 1970s-built former borstal that closed in June last year.
Mr Stewart said Glen Parva would be privately financed while another new prison planned for Wellingborough, in Northamptonshire, would be paid for by the taxpayer.
The Ministry of Justice has yet to confirm who will run the prison but outsourcing firm Interserve is seeking detailed planning permission for a final design of the jail.
The Government wants the new 1,600-inmate category C male adult prison – on the site of the demolished former young offenders institution – to be open by 2021.
South Leicestershire Conservative MP Alberto Costa said he had been briefed on elements of the plan by Mr Stewart earlier this week.
He said he had not been told why Glen Parva was to be a PFI while Wellingborough was to be publicly funded.
He said: “My guess is it is simply budgetary availability.
“However it is funded it will mean major investment in Leicestershire.
“I said to Rory that local suppliers must be given every opportunity to tender for the building of the establishment.
He has been very receptive to the issue I have raised.
“This money is being invested here and the benefit must be felt here.
“It’s not clear who will operate the prison but it is likely to be privately-run.
“My job is to continue to press to get the maximum benefit out of this for Leicester and Leicestershire.”
Blaby District Council is currently considering Interserve’s detailed planning application and subject to it being approved, as outline permission was, the Ministry of Justice wants building work to begin later this year or in early 2019.
Staff and prisoners from the former prison have been transferred to other prisons in the interim period.