The spiralling cost of contracts for rubbish disposal, road repairs and support services, such as care for the elderly and the handicapped, has caused fees to rise from £10 billion to £18 billion in five years.

Ministers have been so alarmed by the increase that they are setting up a high-level review with industry and council leaders.

The inquiry, to be announced next month, will look at how to curb outsourcing costs by simplifying tenders and improving negotiating skills. It will also assess whether more services should stay in-house.

Lord Bruce-Lockhart, chairman of the Local Government Association, told The Times that another large council tax rise of about 4 per cent was inevitable because of both the pressures of more elderly people and rising private sector charges.

He said that in some cases private companies appeared to be charging the public sector more than they would for the same service to private clients. Private companies could put in high bids for tenders because there was little competition, he argued.

Lord Bruce-Lockhart cited bills for road maintenance, paid by councils, that were rising at twice the rate of inflation at an “outrageous” 7 per cent a year. “The impression we get is that similar contracts within the private sector are not running at twice the rate of inflation.”

He predicted that the average band D bill would rise to more than £1,300 in April with final decisions made in February. The average band D council bill has risen by 84 per cent since 1997, after successive increases above inflation.

Councils had been given only a 3 per cent grant for next year and were expected to make efficiency savings on top, but inflation in the private sector jumped by 7 per cent in the last year, Lord Bruce-Lockhart said. Inflation is now running at 2.7 per cent on the Government’s preferred indicator, which is the consumer price index

Spending on private sector contracts has nearly doubled in the past five years and now accounts for 20 per cent of local government expenditure. Lord Bruce-Lockhart, the former Tory leader of Kent County Council, said that this was not always cost-effective. “If we are trying to bring down public sector costs as a whole, we have to try to bring down private sector inflation.”

He added that while councils could push down their own costs, by reducing staff, this was not so easy with private sector contracts that could run for several years.

In addition, only a few large companies were monopolising the most lucrative contracts, such as waste disposal and treatment.

The tripartite review is to be chaired jointly by Lord Bruce-Lockhart, Richard Lambert, Director-General of the CBI, and Stephen Timms, the Chief Secretary to the Treasury.

Part of the inquiry will look at whether local councils have enough skilled staff to negotiate cost-effective and competitive contracts. Authorities will also be encouraged to combine forces to share information and invite joint tenders for big procurement contracts and capital projects.

Prices for waste disposal services rose between 5 and 7 per cent a year from 2000 to 2005. Similarly, unit costs in privately run children’s homes increased by 45 per cent between 1999 and 2003, while those in local council provision rose only 28 per cent in the same period.Part of the problem is that councils are now locked into Private Finance Initiative (PFI) contracts that run for between 8 and 20 years and cannot be renegotiated.

But Lord Bruce-Lockhart also argues that the public sector contracts are high risk for private companies because of litigation and red tape so few are keen to enter the market.

He also predicted that council tax would be contained at only about 4 per cent by restricting further home care to the elderly and handicapped to keep costs down.

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