Many voluntary adoption agencies are worried they will have to close down as a new report reveals that a fractured relationship with local authorities is resulting in fewer contracts and fewer children being placed in adopted families.

Local authorities grossly underestimate the costs of placing a child, a report by think tank Policy Exchange revealed on Monday. Authorities currently pay voluntary adoption agencies £23,842 to source and match a potential adoptive home for a child, but pay only about half that to other local authorities, leading to an impression that the adoption charities are an expensive option.

However, figures released by the DCSF show that the actual cost of placing a child is £35,340 - more than one and a half times the compensation actually paid to charities.

“The inter-agency fee [paid to charities] is grossly underestimating the value of the adoption ‘market’, starving voluntary adoption agencies of financial oxygen,” the report stated.

Two-thirds of agencies interviewed for the report said they had seen a decline in the number of contracts awarded them by the mis-informed local authorities. Forty per cent said their ability to continue working was in doubt.

The report calls for local authorities to engage more with the voluntary sector, from the initial stages to placement. Local authorities need to be made more aware of the value of the adoption charities and the true cost of the service provided.

This current lack of balance and understanding in the adoption process, the report contends, has resulted in a decline in the number of children in permanent foster care who are adopted, “despite significant financial investment and considerable political will”.

Author and research fellow James Groves said: “If local authorities moved away from funding adoption services annually and instead took a five-year view then the concern over upfront costs will be removed. Doing this will allow councils to look at adoption service providers other than themselves and ensure fewer children have to stay unnecessarily in foster care.”