The review into the quality and use of children's homes - commissioned by the Prime Minister last October - concluded that standards are generally high despite relatively little investment going into developing best practice, but that councils have failed to deliver sufficient "value" for the amount spent on placements.
Children's charities have largely welcomed the review's findings, and the government has said it will act on a number of its recommendations.
In his report, Narey says the role of children's homes is "misunderstood", the challenges of the children they care for "underestimated" and the contribution they make "too easily dismissed".
He said many social work professionals and senior managers view residential child care as a "last resort" and somewhere to "park children temporarily", which in turn has led a reduction in the use of children's homes.
"I found little - beyond a certain optimism - to justify that view," Narey said. "There is a very real and unmet demand for the greater use of children's homes as part of an initial assessment for older children when first coming into care, and those on the edge of care."
Latest Ofsted figures show there are around 7,000 children in residential care, and that three quarters of children's homes are rated "good" or better by the inspectorate.
However, Narey's review makes 34 recommendations for improvements to the residential child care system, including calling for the creation of a Residential Care Leadership Board - comprising experts, Department for Education officials, local authorities and a range of providers - to lead the sector and report directly to the children's minister. Such an approach has been developed in adoption, and Narey, the government's former adoption adviser, says it will lead to quicker and more consistent improvement in provision.
The review criticises local authorities for a "failure to obtain reasonable value for money" when using residential care - it is estimated councils spend around £1bn a year on children's home places. Narey believes a leadership board could improve commissioning practice, help councils get better value, advise ministers on demand for services, and develop best practice in workforce recruitment.
Another of Narey's recommendations is for the creation of Staying Close provision to enable young people leaving residential care to stay in accommodation near their children's home to help smooth the transition to independent living. In its response to the review, the government has committed to trialing Staying Close later this year.
Other review recommendations for councils include:
- prioritise finding the right placement over placing children close to home
- not to assume small homes are better than larger ones
- reduce the amount spent on secure placements by working collaboratively
Anna Feuchtwang, chief executive of the National Children's Bureau praised the review as "refreshingly positive".
"It should ensure that once and for all children's homes are given the status they deserve and never used as a last resort for children who have experienced numerous foster placements," she said.
"Residential care is the best option for many children and if the government takes forward the review's recommendations it can be even further improved.
"It is particularly vital that the proposals for Staying Close are quickly followed through and that crime reporting procedures for children's homes are made the same as in schools so that children are no longer needlessly criminalised."
Children England said the report painted "an authentic and well-evidenced picture of the key issues and challenges for residential care".
"The report highlights that one of the deep-rooted problems in ‘the marketplace, has been a lack of strategic commissioning, over-reliance on framework contracting, and generally, too much focus on ‘shopping, for placements, instead of commissioning good homes," a Children England statement said.
However, the Independent Children's Homes Association (ICHA), while welcoming many of the review's findings, warned against councils interpreting the recommendations for getting better value as an opportunity to drive down fees.
ICHA chief executive Jonathan Stanley, said: "The sector is surviving a famine of fees, income is barely meeting outgoings, and reserves are all but drained. As a result the sector could be extremely alarmed with the potential for Sir Martin's comments to be read that local authorities can reduce fees still further without doing anything different."
Anne Longfield, children's commissioner for England, welcomed the report's recognition that many children living in residential care see it as a positive experience.
She said: "No child is the same and no residential children's home is the same but the best homes will be supportive environments with caring staff that can provide children with a sense of commitment and belonging which may have been previously absent in their lives.
"The individual circumstances of young people and the wide range of experiences that lead to children entering care mean there should not be a one size fits all solution and we need a range of options that best meet their needs."
