Standards in social care are being undermined because the handful of private companies which dominate public sector contracts are now "too big to fail", a new report warns.

Outsourcing was supposed to drive up standards and cut costs, but the dominance of multinationals such as Serco and G4S risks harming vulnerable people, it claims.

Britain faces "another banking crisis" in the care sector unless charities and social enterprises are given a greater slice of the market, according to the report's authors.

Peter Holbrook, the chief executive of Social Enterprise UK, who commissioned the investigation, told The Independent: "Britain's most vulnerable people are suffering as competition and the delivery of efficient care is replaced by short-sighted bidding wars and low-quality service."

The outsourced market for public services has an annual turnover of £82bn, which is predicted to rise to £140bn by 2014. The report identifies the emergence of a "shadow state", with a small number of companies taking "large and complex stakes in public service markets, and a great deal of control over how they work".

G4S, which made headlines this summer for failing to provide sufficient security at the Olympics, has contracts with 10 government departments and agencies and 14 police forces.

Serco has dozens of private contracts, running everything from prisons to hospital facilities to council waste collection. "Its failure would cause extreme turbulence in public services. No business should be too big to be allowed to fail," the report warns.

About £1bn is spent every year looking after children and young people in residential care, with Sovereign and 3i the major private players. But the report found that it is "hard to pinpoint who owns what; their waters seem to be in perpetual motion, as they buy from one another and take one another over, and offload assets."

Other private operators whose substantial public contracts are highlighted in the report include Atos, which has the contract to perform disability assessments, and Capita, which was recently named as the preferred bidder for a £1.7bn, 20-year contract to run educational services in Staffordshire.

"If we are going to go down this route of further marketisation, then it is imperative that these markets are open, transparent and well-functioning," Mr Holbrook said. "There is a very small number of companies dominating these markets, and they surround themselves by complex legal structures so that it is hard to understand the level of profit they are taking from some of these contracts".

The report, which is the result of interviews with policy-makers and front-line workers, accuses profit-seeking companies of bidding for public-sector contracts on short-term price alone, with devastating long-term effects, including a "race to the bottom" on pay.

One unnamed home-care worker for a "sizeable private provider" is quoted as saying: "Most of the carers don't have English as a first language. It's always the minimum wage."

Charities and social enterprises can no longer compete, the report claims.

A G4S spokesman said yesterday: "There is absolutely no way we are comprising on service, for the very reason that every government contract we provide has to meet strict criteria and if we fail we incur financial penalties, which is not something echoed in the public sector."

A spokesperson for Serco said: “We are passionately committed to delivering high quality services to all our customers and to members of the public who make use of them. And it is only by delivering continually high quality services that we are able to be successful as an organisation.”

Public sector market: Outsourcing giants

G4S Had its contract for Wold prison revoked last month after a shambolic performance in providing security at the London Olympics, pictured. The Government remains its biggest client, with 14 police forces within the firm's remit.

SERCO Major shareholders include HBOS and Lloyds. Government contracts include maintaining the Docklands Light Railway, missile defence systems and military bases, and security services for the young offenders institutions.

ATOS The French multinational turned over €8m (£6.5m) last year. It made headlines after losing a memory stick with the passwords and names of a government computer system were found in a pub car park. Clients include the UK Border Agency.

CAPITA Contracts span administration of public-sector pensions and public grant programmes. Recently named preferred bidder for a 20-year contract to run educational services in Staffordshire. Specialises in "Business process Outsourcing".