The scheme, which has private and public-private consortia taking over an authority’s services, ran into trouble this week. One of the main players expected to bid for the pound;15 million-a-year contract to run schools in Islington, north London, pulled out at the 11th hour.

This leaves three consortia: Cambridge Education Associates with Hammersmith and Fulham Council; the education charity CfBT with Essex; and Nord Anglia. Whoever wins the business will have to meet a set of exam targets, with a fine worth 5 per cent of the contract if they fail.

Rupert Perry, Islington’s education chair, said many councils would find the risks too great. They could have to explain to their voters why they were being fined by another council because that other council’s children had not hit test targets.

Tim Brighouse, chief education officer of Birmingham, said he regretted having to pull out of the Islington bid, made with consultants Arthur Andersen. He said while the financial penalties were part of the reason, he blamed the nature of the contract which meant he and Arthur Anderson were not satisfied they could deal with the risks.

Consultants PriceWaterhouseCoopers were called into Islington following a poor inspection report. The council then suggested a joint venture with a private company, but was blocked by the Government.

The DFEE has approved 10 companies as suitable to take over council services. Mr Perry said this was too restrictive. “There is not a proper market in this area. If the Government wants one it will have to invest in one,” he said.

One local government insider said: “The consultants are putting forward contracts that are far too concerned with management structure and function rather than looking at innovative ways to deliver the service.”

Christine Whatford, chief executive of Hammersmith and Fulham, said her council had an advisory role and no financial input in its bid with Cambridge Education Associates.

Liverpool is the next council which might have to consider private-sector involvement -- and some reports suggest the DFEE is already twisting private-sector arms to show interest.

According to private providers, individual schools are already buying their services.

While Southwark Council, south London, is consulting on putting its school improvement service out to tender, schools in the borough are looking to outsiders. Adrian Pritchard, managing director of Centre for Education Management, said some Southwark schools were buying his personnel package.

And Tim Emmett of CfBT confirmed the onset of the Government’s Fair Funding reform had resulted in many more schools using their services rather than their authority’s.