The Government has become too reliant on a small number of "quasi-monopoly" private sector contractors to provide a swathe of public services, spending watchdogs have warned.

The Commons Public Accounts Committee said the Government’s dependence was shown by Whitehall departments continuing to hand work to Serco and G4S while they were being investigated by the Serious Fraud Office (SFO) for over-charging by tens of millions of pounds.

Its report warned: “Quasi-monopoly suppliers are emerging who squeeze out competition, often from smaller companies with specific experience.

"Competition for Government business should bring with it a constant pressure to innovate and improve. But for competition to be meaningful, there must be real consequences for contractors who fail to deliver and the realistic prospect that other companies can step in.”

Margaret Hodge, the committee’s Labour chairman, said: “Government must guard against quasi-monopoly suppliers becoming too important to fail, and encourage competition through, for example, splitting up contracts to encourage small- and medium-sized firms to bid for work.”

She warned that contractors had not shown "an appropriate duty of care" to taxpayers and users of public services. "A culture of revenue and profit driven performance incentives has too often been misaligned with the needs of the public who fund and depend on these services," she said. "Departments have taken their eye off the ball and placed too much trust in contractors and relied too much on the information contractors supply."

The cross-party group of MPs rebuked ministers for wrongly giving the impression that all business with the firms had been suspended after it emerged they had been over-charging the Ministry of Justice (MoJ) for electronic tagging contracts.

The committee said, the MoJ as well as the Ministry of Defence, the Department of Health, the Department for Business, Innovation and Skills and HM Revenue & Customs all continued to award them additional work while the inquiries took place.