It seems to me that there are two big objections that can be made to prisons being run by private companies:
(1) The law is very averse to someone putting themselves in a position where it is in their interests for someone to break the law. This is part of the reason why the law objects to people inserting penalty clauses in contracts – the presence of a penalty clause gives a party to a contract a reason to hope that the other party will breach the contract. But if private companies are allowed to run prisons, they will then have a very substantial commercial interest in people breaking the law – if people don’t break the law, they go out of business. This interest that private companies that run prisons have in people breaking the law is personally corrupting, and potentially anti-social as it means private companies could make more money encouraging their prisoners to pursue lives of crime than they could (through incentive payments from the government) by rehabilitating their prisoners. (No company would ever want to invent a light bulb that never breaks, or a razor that never gets blunt.)
(2) Equity categorises certain categories of people as ‘fiduciaries’ and prevents them making a profit from the decisions that they make where the prospect of making a gain for themselves might have an adverse effect on their ability to properly discharge their duties. So, for example, a trustee who invests money for a client will not be allowed to invest that money in companies that the trustee owns (thereby boosting the share price of the trustee’s companies) because if he were allowed to do so, the prospect of the gain he would personally make by investing the trust money in his companies would subconsciously tempt him to think that investing the money in his companies would be in his client’s best interests when it might actually be a disastrous investment. So in order to make sure that the trustee does a good job of investing his client’s money, the law requires him not to invest the money in any companies in which he has an interest. It seems to me strongly arguable that those who run our prisons should be categorised as ‘fiduciaries’ and required not to make a profit from the way they run the prisons. If they were allowed to make a profit from the way they ran a particular prison, there would be a too much of a danger of their being subconsciously influenced by the gains they might make for themselves into thinking that ‘we only need a certain number of warders on duty at night’ or ‘the food supplied by Slop Co [the lowest bidder for the catering contract] is perfectly adequate for the inmates’ or ‘we only need to provide two computers in the prison library’. Of course, there might be ways of dealing with these temptations, if acted upon – for example, regular independent inspections by regulators empowered to order the prison to come up to certain standards. But such inspections would only be necessary because we have created a problem in the first place by allowing private companies to run prisons, and would not necessarily prove effective at solving the problem, as independent inspectors cannot see everything and might lose their independence by coming into contact with the people they are supposed to regulate.