Good investments are hard to come by in these low-interest times. But here's an eye-catching brochure from Gravity International. It shows the exceptional profit a canny investor can make from services the state outsources to the private sector.

Here's the offer: a phenomenal 18% return guaranteed in one year, with your investment safely secured on a property (though in reality nothing is ever that secure). What is the business? Caring for the most disabled, disturbed and needy children in residential homes.

As soon as I applied online for a brochure, eager Luke, the portfolio manager, called to hard-sell the investment. Caring for these children is highly profitable, he said, with each child worth at least £2,500 and up to £5,500 a week for the multiply disabled, abused and damaged. "The naughtier children pay more," he explained, with a bit of a laugh – though "naughty" might not be in the official social care lexicon. There are, he said, long waiting lists of children needing places. He rattled through the figures: their four-bed homes will make £214,000 a year profit at 75% occupancy and a whacking great £624,000 profit at full-bed occupancy. The brochure breaks down all the costs: staff at £232,100, food at £12,600 and so on.

The children in the brochure (posed by models) are the most beautifully healthy, happy specimens you could find. "Our philosophy," says Gravity, encourages them "to flourish and reach their full potential" – just like their investors' wallets. Perusing Gravity's promised equestrian and outdoor pursuits centres, these sound like holiday camps. And so they should, since a place for a "naughty" child costs the same as nine children at Eton. Or you could put each one in the Savoy with a personal tutor. I have no idea whether these homes are Dotheboys Halls or providers of excellent care. But, however good, the huge sums skimmed off the top in profit would be better spent on extra psychotherapy and education for children whose outcomes are so dismal. A quarter of prisoners come from care.

There is, says the brochure, opportunity here because "UK government restrictions on public spending have had an impact on already overstretched resources of many local authorities", yet they have statutory obligations towards children. "The effects of government fiscal policy are now being felt by those authorities who have an under-supply of good homes." As local authorities can't raise capital to create new homes, nor even to repair their existing homes, the opportunity there is for the company to create new ones and buy up current council homes to sell their services back – at this high profit.

In other words, because councils can't borrow to invest – even at borrowing rates far lower than any private company can raise – they must outsource at far greater expense. That's the accounting insanity that pervades this era of austerity. It's the same with housing: having sold off 2 million council homes without using the money to replace them, the state rents back those sold-off properties from private buy-to-let landlords at three times the cost to the housing benefit bill. Treasury rules on borrowing often end up costing the state more.

Children's homes are just a particularly graphic illustration of some of the more dubious "savings" from the outsourcing that began in the 1980s. In quality, Ofsted records slightly better ratings for local authority-run homes compared with private (the non-profit sector is very small), but the grim fact is that a third of all homes across all sectors are only rated "adequate", with the Children's Society and others claiming Ofsted sets its standards bar worryingly low. Success rates for looked-after children have improved, says the Office for National Statistics, but show a massive gap between the 15.3% getting the benchmark five good GCSEs compared with 58% of other children – a gap that has grown since 2009.

Turn to LaingBuisson, the research analysts of private health and social services, for an insight into this market. William Laing tells me the sector is developing. His most recent report on the children's social care sector offers plenty of encouragement for investors. In the two years between 2010 and 2012 outsourcing to private children's homes rose 8% to 67%, "encouraged by capital shortages" and this "momentum still has some way to run". His report warns that the private sector has more trouble hiring highly qualified staff for its homes than the council sector, which also costs less while paying staff better. LaingBuisson says the future is brighter for investors in social care than in privatised NHS services because the "political environment remains benign" with "public sector vested interests in the social care sector so weak and poorly represented" compared with the NHS, where "political support against outsourcing can still be readily mobilised in strong support of NHS vested interests". That's the importance of unions.

However, investors are warned that "concerns about the quality of children's services run deeper than Ofsted ratings", with the education select committee recently complaining that many children are placed hundreds of miles from their families, beyond reach of the social workers supposed to care for them. The risk, says LaingBuisson, is homes put in "low cost areas for financial reasons that may contain an excess of predatory individuals with potential for sexual exploitation". Children's services can be "a high risk activity for providers where damage to reputation could be very costly".

But it's a rising market, with more than 68,000 in care last year, up 2%, partly due to cases such as Baby P. Of these, 5,000 are in residential homes, usually after multiple foster-care breakdowns. Children's social services directors say they have many more high-cost multiply disabled teenagers with severe learning difficulties, who used not to survive premature births. The Independent Children's Homes Association claims councils send it the hard cases, while keeping easier children in their authority homes. Profits, it claims, average just 3% – though LaingBuisson puts profitability at 14.4%. G4S and Serco are among those in the children's home business.

Making money out of tragic children is the extreme end of the outsourcing culture. As the High Pay Centre has analysed, the history of contracting and privatisation has mainly been high cost and high profit for worse service. This 30-year policy has, without evidence, been driven by contempt for the idea of a public ethos, and conviction that private is always best.