Ministers are preparing for a massive expansion in electronic tagging of offenders, with private security companies being invited to bid for more than £1bn worth of contracts next month.

The use of electronic tagging has grown rapidly since it was first used in 1999 by courts in England and Wales to enforce curfews. Now more than 20,000 offenders are monitored by private security firms on any given day.

The current eight-year contracts, which are held by G4S and Serco electronic monitoring services, are due to end shortly. The Ministry of Justice says more than 30 companies have expressed an interest in competing for the new contracts when bids are invited this October.

Fewer than 3,500 electronic tagging orders were made in 1999, a figure that rose to cover more than 70,000 people last year. It is estimated that more than 450,000 people in England and Wales have spent time electronically tagged over the past decade.

The justice secretary, Ken Clarke, is planning a further significant expansion in the use of tagging as part of his drive to improve public confidence in alternatives to prison. His sentencing and punishment bill, which is now before parliament, will give the courts powers to extend the tag curfew limit from 12 hours a day to 16. The bill also proposes doubling the length of a curfew order from six to 12 months.

The extension of tagging comes as G4S prepares to take over the Victorian inner city prison at Winson Green, Birmingham, this weekend, the first in the UK to be transferred from the public to private sector. Serco is about to start the first "payment by results" offender services pilot scheme at Doncaster prison with similar schemes to follow at eight more prisons. Plans for the largest-ever wave of jail privatisation with nine public sector prisons being put out to tender this autumn have already been announced.

Only last week the justice minister, Lord McNally, warned a Liberal Democrat conference fringe meeting of the danger of a "semi-monopoly" developing with the largest security companies, such as G4S and Serco, winning the majority of justice contracts.

The main form of tagging used in England and Wales involves the offender wearing a tag around their ankle or wrist which sends a signal back to a monitoring unit at their home address. A text message-style signal is sent to the company's monitoring centre if the offender breaks the circuit by leaving home during the curfew hours. Tagging is used both as a community penalty and to monitor prisoners released early on home detention curfews.

The latest expansion in tagging comes despite official statements that electronic tags have no impact in reducing the reoffending rates of criminals or the number of contractual penalty payments of more than £273,000 over the past four years by G4S and Serco for service failures.

"The re-competition [sic] of these contracts offers the market an opportunity of significant scale (based on current spend, the total contract value is likely to be in the region of £1bn)," says the Ministry of Justice in its latest competition strategy document.

Ministers hope the new contracts will cut the current unit cost of £1,063 for a 90-day adult curfew and £1,935 for a 120-day juvenile curfew.

"The expected reductions in the unit cost of delivery are likely to provide significant opportunities for both savings and service improvement. This will also provide opportunities for greater involvement of small and medium enterprises – in this case, companies offering innovative tagging technology," says the strategy.

Up until now more ambitious uses of electronic tagging, such as satellite tracking and voice verification to monitor an individual's daily movements, have been limited by the impact of tall buildings on the patchy mobile phone networks the system relies on.

The Ministry of Justice has always maintained that tagging provides the courts with a credible alternative to prison. But ministers admitted to MPs two years ago: "Current evidence suggests that electronic monitoring has a neutral effect on reoffending. However, international research does suggest that it can be effective in helping to ensure compliance with other, more rehabilitative, community penalties."

Harry Fletcher of Napo, the probation service union, said he was shocked that tagging had become a £1bn industry: "There is no evidence that tagging has any impact on reducing crime. It is also very expensive, with a 90-day tag costing £1,100 to the taxpayer. That is for an outlay of only £400 to £500 assuming only one call-out to the offender for each order. So there is a huge markup," he said.