Too many children are being forced to leave foster care or residential care at 16. Even if they hadn't already had difficult lives, they wouldn't be ready for independence, as you can see from looking at any other 16-year-old. Charities that help in this circumstance say kids often arrive without the slightest means of looking after themselves, without birth certificates or National Insurance numbers, having been allocated totally unsuitable, ramshackle accommodation miles away from their foster homes or anyone they might have known or relied on during the "cared-for" period of their lives. Why would a local authority be so heartless? Shouldn't kids who have been taken into care expect the local authority to act in loco parentis, in its truest sense, as if it has a meaningful, protective impulse?

These questions are thrown up periodically – in adult social care as well as in children's care – and it always goes like this: local authorities or similar statutory agencies aren't doing enough; a major charity calls on them to do more and supports the argument with chilling case studies; it's a story, until something else happens, and then it's an ex-story.

We don't have a particularly strong tradition, in this media trajectory, of asking what happened to the money. You can be sure money is being spent – it costs between £200,000 and £300,000 a year for residential care for a child, and £30,000 to £60,000 for foster care. Why is it so expensive? (For comparison, it costs £30,000 to keep someone in a low-security prison for year, and £30,000 to send someone to Eton.) Who gets the money? It's a long story, but the answer emphatically isn't the carers or the foster family.

After 20 years of outsourcing, the bulk of children's homes are run by private companies, with money sucked upwards into one or two private equity companies, GI Partners or Bowmark Capital or Baird Capital. Two-thirds of fostering provision is controlled by the private sector. Only 11% of children's homes are run by charities; the third sector started off quite big in children's care, as you'd expect, meeting local-authority contracts by spending their own reserves. Eventually, though, the private sector underbid them, and they went bust or moved into other services.

Having whittled down the competition, the private sector became eye-poppingly expensive: £200,000 is actually a low estimate, based on overall spending of £1bn on 5,000 children in residential care homes in England. In 2009, it was leaked that CastleCare, which runs 40 homes in Northamptonshire, was charging £378,000 a year for a residential place. This would be money well spent if the care was brilliant, but it isn't. Only 2.5% of children's homes have an Ofsted rating of "outstanding".

For that kind of money, you could send them to the moon; instead, children are sent to wherever the companies across the chain can make most profit. This makes sense of what would otherwise look like perverse, bordering on cruel, decisions. Companies buy homes where properties are cheapest; this could be many miles from the child's local authority; even if it's just 20 miles away, that's still far enough for the child to lose contact with the placing authority (not to mention anybody they may have known, their extended families, their teachers and their friends).

In 2011 Greater Manchester councils placed more than 1,000 kids "out of borough" – "dumping", as some experts call it – but also received children from other authorities. In all likelihood, the number of children in residential care in the area remained the same, but the difference was that links had been severed between the child and the social worker.

Sometimes local authorities commission responsibility out to one another, and sometimes they just keep their fingers crossed and hope they get time to do it themselves. By the time the kids are adults, they may not have had direct contact with their social work team since they were placed in residential care. It puts significant pressure on the local services of wherever they have been placed if you tot up the cost for health and mental health services, police, school interventions, the constellation of agencies that have to get involved when children in care aren't being properly cared for. But apparently this is what efficiency looks like, spending £200k-plus a year to wash problems out of your own area, so they spring up 10 times more expensively somewhere else.

At the end of this period in "care", then, why are kids and young adults moved miles away from their foster homes? Why are 44% of 16-year-olds who leave care still not in education, employment or training three years later? For the same old reasons – because housing is found wherever it's cheapest.

The cheapest house in the UK went on sale this week, for £750, in Stockton. That's also where a huge amount of asylum seekers' and post-care housing is – I know, wild coincidence! It's quite a saving, but mainly for the contractor rather than the government. Where housing is cheap, the local economy tends to be sluggish, and unemployment is generally high. Brilliant. Now you have a young person with no roots, no money and no realistic prospect of employment. I don't know why we don't just cut out the middle man and send them directly to jail.

It's reasonable to talk about the morality of having a profit motive in this sector at all. You shouldn't run a home for a profit. But before we start on any of that, we need to scotch the idea that private-sector involvement has made any of this any cheaper.

Twitter: @zoesqwilliams

• This article was amended on 1 November 2012. The original referred to spending of £1bn on 5,000 children in care. These figures relate to children in residential care homes in England. This has been corrected.