A "payment-by-results" pilot project aimed at cutting reoffending has officially been launched.
Investors have put £5m in social impact bonds to fund rehabilitation work with 3,000 Peterborough Prison inmates.
They could earn a return of up to £8m from the government and the Big Lottery Fund if their cash helps rehabilitate criminals.
Labour gave the groundbreaking scheme the go-ahead but new Justice Secretary Ken Clarke has fully embraced it.
The government has said the pilot is the first project of its kind in the world.
Mr Clarke has indicated the scheme, which may also cut court and jail costs, might be introduced in other prisons in England and Wales if it is successful.
The social impact bond scheme is jointly run by the Ministry of Justice and Social Finance, an ethical investment bank run by a former top City banker.
The money raised by Social Finance from charitable trusts and social investment groups will fund organisations including the St Giles Trust, a specialist charity with a proven record in rehabilitating offenders.
Earlier this year the trust published an economic evaluation of its Through the Gates rehabilitation programme which suggested that the government saved £10 for every £1 invested in such schemes.
The Peterborough prisoners will be given mentors when they are released and they will be given assistance to find jobs and housing and wean themselves off drugs if they need to.
If the money helps cut reoffending, this scheme could return up to £8m to investors, comparable with an annual return of 7.5% in a conventional bond-market investment.
Reoffending among the target group must fall by at least 7.5% to trigger the dividend payments in each of the six years of the bond's operation.
No guaranteed return
The return on social impact bonds is seen as a share of the financial benefit gained by society when a criminal goes straight.
But as with other finance bonds, there is no guarantee of a return and investors could lose all their money if reoffending does not fall.
Male prisoners sentenced to less than a year at Peterborough Prison will take part in the scheme.
Although the official launch was on Friday, the scheme began on 16 August - with the first prisoners to go through it leaving the facility on Thursday.
Mr Clarke said that reoffending was the "weakest bit of the criminal justice system" and that the radical bonds would help tackle it without using taxpayers' money.
"It pays by results," said Mr Clarke. "We're going to pay what works and what works should therefore grow and what doesn't work will vanish.
"I like the innovative funding, the payment by results, the collaborative groups, and if it succeeds it will grow and if it doesn't, by that time we will be trying something else.
"But sooner or later, something has got to be done about reoffending."
Social Finance said there would be indications of whether the project was succeeding within a year but the full return would not be known until the end of the six-year investment term.
Social Finance director Emily Bolton said: "Investors benefit and the government gets some cost savings. The better the reductions in reoffending, the higher the investors' return.
"It's not taking money out of the system, in fact it's enabling us to transfer the money to more socially valuable things."
Barrow Cadbury Trust chief executive Sara Llewellin said she was delighted the charitable foundation was among the first batch of investors.
"For us this is a win-win; we can invest rather than just give a grant. If the intervention is successful, we can then invest any money gained in more socially useful projects," she said.
Rob Owen, the chief executive of St Giles Trust said the scheme provided a "rehabilitation revolution" and he was pleased six caseworkers from the charity had been involved from the outset.
"It is about engaging the offenders while they're in prison and assessing their needs and helping to deal with them. They are literally met by one of our caseworkers as soon as they leave the prison and we give them the guidance we can.
"Most of these men will be in prison for just 30-35 days before they're on release - for us it's an intense period but we have to tailor our approach. One size does not fit all in these cases."
Paddy Scriven, general secretary of the Prison Governors Association, said the scheme was a postive step foward but must not exclude the most persistent offenders.
She said: "The thing that has to be guarded against is that if this sort of scheme spreads and it is payment by results, that the not-for-profit sector people and charities that are administering it don't cherry-pick the most likely successes and leave the very hardline cases to the Prison Service, or more importantly the Probation Service. Then the success is measured unevenly."
Labour MP Jack Straw, who first announced the scheme in March while justice secretary, told the BBC the project involved an element of risk, but added: "If you look at the difference between costs between turning someone round in probation rather than in prison, the benefits will flow back to the state rather quickly."
Jon Collins of the Criminal Justice Alliance, a reform campaign group, said the project could have the potential to help thousands and added: "Bringing money in from new investors to fund this work will also ensure that it is able to continue at a time when the Ministry of Justice's budget is facing severe cuts."