SKM provides recycling services for more than 30 councils and has warned up to 400,000 tonnes of waste could end up in landfill per year.

Environment Minister Lilly D’Ambrosio said on Sunday that the government had been working with the councils who have contracts with SKM to look at alternatives for managing kerbside recycling collection.

"SKM's ongoing non-compliance is unacceptable and we make no apologies for taking the necessary action to protect the community from dangerous waste stockpiles," she said.

Transport Intrastructure Minister Jacinta Allan defended the government’s actions and said work to find an alternative has been ongoing.

“This is a private business who, obviously will make their own private choices about what they do with the future of that business. However, the government makes no apologies for having, through the Environment Protection Authority, taken the action it needed to take because the advice was that it was engaging in unsafe practices,” she said.

“The operator has made some statements. We’ll need to see if they eventuate, but regardless of whether they eventuate, the government has already got a suite of measures on the table that’s designed to attract another industry participant into this area."

She said $135 million was being spent to help attract another operator.

“The government, though, already has an eye to that, which is why we’ve invested already $135 million on a range of actions that includes working with local councils who have a very big and important role in this and also looking at – as a result of those actions – ways we can engage other industry players … to come into this industry into the future.”

However, Municipal Association of Victoria president Coral Ross said there might not be many immediately viable solutions.

"SKM make up about 50 per cent of the kerbside recycling market – the other two are Visy and Polytrade," Ms Ross said.

"We have been working through contingency plans, but it's not clear what capacity our recyclers actually have.

"Some councils may be able to find alternatives, but we can only really go by our recent experience earlier this year, which suggests there’s little capacity.

"The solution will require a partnership between all levels of government and state waste management industries."

Opposition spokesman David Davis told AAP the government had not done enough.

‘This whole recycling fiasco is entirely [Premier] Daniel Andrews’ and his government’s making. It is an absolute and total shambles.

‘‘Now we see the predictable catastrophe, the predictable fiasco. It is a circus.”