SKM Recycling founder Giuseppe Italiano has flagged the business will shut down this week, leaving the state's embattled waste industry and local councils scrambling to find a solution.

The company collects about half of Victoria's kerbside recycling.

SKM has had a series of fires at its Melbourne sites, leading to a crackdown by the environmental watchdog for licence breaches, including stockpiling material.

Mr Italiano is facing fines and legal action, prompting him to declare he cannot afford to continue operating.

"I've put millions of dollars into recycling, which no one else has. I've run out of money to pay for bad management by (Premier) Daniel Andrews and the rest of them," he told the Herald Sun.

The City of Melbourne does not have a contract with SKM, but deputy lord mayor Arron Wood on Monday pointed to a peaceful resolution.

"There's potentially an investor who will invest in SKM," he told ABC radio.

"We are not sure what this week will hold, but obviously, the best outcome is that SKM can secure an investor who is going to put some decent money into them and modernise their business model."

The potential investor was not identified.

More than 30 councils have contracts with SKM and if the situation can't be fixed, ratepayers are expected to foot the bill to send recycling to landfill.

Municipal Association of Victoria president Coral Ross said the state government should provide immediate support to boost capacity at remaining recycling facilities.

"If this material does have to go to landfill, we would certainly seek that the government does not impose the landfill levy (on councils)," she said.

Victoria could consider a container deposit scheme, similar to those in place in other states, she added.

Deputy premier James Merlino said Labor was not letting the matter lie, noting the government had already invested $135 million in recycling reform.

"In terms of the future of recycling and SKM, the government is working very closely with the 31 councils that have a current contract with SKM, looking at what alternative arrangements are in place," he told reporters.

"I am not going to pre-empt those discussions or make any announcements today.

"Recycling into landfill should be a last resort."

Opposition Leader Michael O'Brien said the government had failed to properly regulate the sector and must take action.

"Victorians are good at separating their recyclables. Daniel Andrews is sending them all to landfill because of this crisis in the recycling industry," he said.

Mr O'Brien and Greens acting leader Tim Read have both called for the state government to use $500 million raised through the landfill levy to fix the sector.

The recycling woes have been compounded by China's restrictions on importing material. At times, some councils have been forced to send recyclables to landfill.

Australian Associated Press