Thornton Hall prison is now expected to be built in "phases" and is likely to be funded by the National Pension Reserve Fund, the Sunday Tribune has learned.

Plans to develop Thornton as a "super prison", as originally proposed, have now been shelved due to the economic climate and a smaller prison will now be built.

Taking the project out of public-private partnership (PPP) will delay building works for at least two years.

Prison sources say it is estimated that some parts of the prison, which is to replace Mountjoy, will be operational by 2013, "assuming everything goes to plan".

The Irish Prison Service said last week it had broken off negotiations with the PPP consortium chosen to provide the prison at Thornton Hall.

The Léargas consortium was the preferred bidder in the competition to design, build, maintain and finance the jail in north Dublin.

The prison service said that an evaluation of a final financial offer from Léargas deemed that it would not be affordable. It is understood the consortium is now considering taking a legal action following the breakdown in communications.

The Léargas consortium has spent €10m on the project over the past two-and-a-half years – €6m on design consultancy fees and other costs of nearly €4m, according to James Morrissey, a spokesman for developer Bernard McNamara who formed the Léargas consortium along with Barclays Private Equity and GSL, the international prison operator.

Sources from the Department of Justice indicated that the best way to get value for money in building the prison is to do it in phases, as construction costs have dropped, and fund it by other means rather than "effectively be saddled with a mortgage under PPP".

Justice minster Dermot Ahern is examining how best to pay for the prison if it is to be taken out of PPP, and the National Pension Reserve Fund is being looked at as an option.

In a statement released to the Sunday Tribune, Brian Purcell, director general of the prison service, insisted the recent developments were just a setback and the prison will be built.

"All aspects are being reconsidered including whether to continue with PPP or traditional procurement or a combination of the two. We are also carefully examining all aspects of the current design to see if it can be made more affordable," he said.

The Léargas consortium was requested to drop the quoted price of €400m by 20% recently.

In response, Morrissey said: "If 20% were taken off the construction price, as has been suggested by the Irish Prison Service and the Department of Justice, this would not have been acceptable to the funders."

The prison service will now have to re-tender for a firm to take over construction of the new jail.