The Scottish Council for Voluntary Organisations has criticised what it calls "pseudo-charities" set up by local authorities, which it says are damaging the reputation of other voluntary sector organisations.
The umbrella body said councils in Scotland have been setting up arm’s-length trusts that soak up fundraising income while achieving little public benefit.
The SCVO gave the example of Riverside Inverclyde, an arm’s-length external organisation set up by Inverclyde Council and Scottish Enterprise in 2006 to carry out regeneration work and to create jobs in the locality.
The organisation received £60m over the past seven years from Inverclyde Council, the Scottish government and Scottish Enterprise.
But an external review of its activities found that it had met only 7 per cent of its target to find 2,600 people jobs and just 5 per cent of its target to build 2,285 homes.
The SCVO said the failure of this type of body reflected badly on the majority of registered charities in Scotland and that councils were using these organisations to avoid paying business rates.
John Downie, director of public affairs at the SCVO, said: "The public has a perception of what a charity is and if you were to ask them, I’m sure large regeneration companies controlled by local authorities would not be what they had in mind.
"Charities have to offer public benefit and are meant to be independent from government, yet often these agencies are neither. The SCVO is also concerned that these kinds of organisations might be attracting funding from the government, lottery and trust funds which is designed for charities, not the public sector," he said.
"What is especially galling about this mess is that millions of pounds have been wasted on this pseudo-charity when genuine charities are delivering the type of community-led regeneration now accepted as the key to success."
Reform Scotland, a think tank, said councils were trying to shift responsibility for decisions on employment and regeneration away from politicians.
A joint statement from Riverside Inverclyde, Inverclyde Council and Scottish Enterprise defended the organisation’s achievements.
"Riverside Inverclyde began operating almost in parallel with the worst economic downturn in living memory," it said. "The mid-term review is a snapshot of the work undertaken so far and doesn't detract from the ambition and aspiration for the years ahead. It is also important to stress that we will take on board any lessons that can be learned from it."