Former staff quarters at HMP East Sutton Park were refurbished with the intention of housing up to 16 women.
The plan was for prisoners to live “semi-independently” in preparation for returning to the community.
But the Independent Monitoring Board (IMB) for the prison in Kent said the flats remain empty months after the work and fitting out were completed.
The Prison Service declined to fund the necessary staff to supervise the facility, citing “over capacity” in the estate, according to the IMB.
Its annual report said the decision “flies in the face of the stated policy of aiding resettlement of prisoners back into society” and urged ministers to bring the accommodation into service.
Peter Judges, chairman of the IMB, said: “For residents, who have served long sentences, returning to the community can be quite a culture shock.
“The refurbishment of the flats was intended to help residents become more self-sufficient as part of preparation for release.
“It is a great waste of money to refurbish the flats and then not use them, quite aside from the loss of benefit to the would-be occupants.”
East Sutton Park is an open prison and young offender institution holding around 100 inmates.
The main house is a Grade 2 listed Jacobean mansion set in 84 acres of ground.
It is a “working prison”, with a farm, extensive gardens and profitable farm shop that is open to the public twice a week, according to the IMB’s report, which covers the 12 months to the end of October.
The board concluded that the prison is “well run with residents generally enjoying a good relationship with staff”.
Mr Judges said: “Staff encourage residents to take responsibility for achieving as much as they can from their time at East Sutton Park and provide an excellent level of support.”
A Prison Service spokeswoman said: “The extra capacity at HMP East Sutton Park was built in anticipation of an increase in the number of female prisoners from 2018 onwards.
“Although the population has in fact decreased, this option remains open if this changes in the future.
“We welcome the IMB’s praise of the staff’s dedication to help inmates find employment upon release.”