Draft:The Lump Sum Grant Subvention System

The Lump Sum Grant Subvention System (LSGSS) is a system introduced by the Hong Kong government that provides government support to non-governmental organizations (NGOs). Before that, the Social Welfare Department (SWD) allocated subsidies to NGOs, in order to pay the actual costs incurred in delivering recognized welfare services, and at the same time imposed stringent control on NGOs’ inputs of resources, and examined each expenditure item in great detail. The reform was made to simplify the bureaucratic government input.

Administration
The SWD is responsible for the administration of LSG, while the LSG Steering Committee, appointed by the Labour and Welfare Bureau (LWB), monitors the implementation of LSG and identifies areas for improvement.

After an NGO register for the LSG, SWD will first identify its service areas and draw up “Agreement Service Units” (ASUs). An NGO might have multiple ASUs, each corresponding to a Funding and Service Agreement (FSA) signed with the SWD. FSA defines the purpose, scope and target group (eligibility) of the respective types of service, and stipulates performance standards as the basis of subvention. FSA also sets boundaries on the areas within which subvention resources can be used, and NGOs are required to submit annual financial reports. Within such boundaries, NGOs have the autonomy and flexibility to decide how the resources will be used specifically.

Determinators of LSG amount per NGO
The Lump Sum Grant received by the NGOs is calculated to cover all its preexisting service units from precedent years as well as the newly allocated ones and, unless exceptional adjustments are needed will not be raised over the course of one financial year.

The amount received by each NGO varies and is calculated taking by adding the salaries expenditure to the provision fund and other charges estimated and subtracting the income derived from fees by the NGOs.

Firstly, the Salary expenditure taken into account by the LSG is calculated according to a snapshot of the NGOs in 2000, calculated by taking the Staff numbers in each NGO as of April 1st 2000 and projecting their salary subvention for the 2000-2001 financial year. This created a benchmark for the salary of this NGO, regularly adjusted based on salary adjustments in the civil service due to fluctuation in salaries all across Hong Kong’s economy in the last 20 years.

The Social Welfare Department is to align NGOs with that benchmark, providing those exceeding it with the money on the condition that the NGO must reduce its emolument requirement by 2% each year until the Benchmark is reached.

Similarly, it provides the NGOs ranking below the benchmark with the money corresponding to the benchmark to allow them to build up their staff and activities until the benchmark is reached. To accommodate for potential staff departure and consolidate the NGOs finances, if a member of the 2000 snapshot staff leaves, it will not impact the salary portion of the LSG for the next year.

Secondly, the amount received by the NGOs takes into account additional charges linked to its functioning (for example: parking charges for its employees) declared annually. Due to price fluctuations, the amount is adjusted to the Consumer Price Index. As an indication, the 2023-2024 Other Charges part of the LSG calculation will be increased by 1.9 % to follow the inflation.

Thirdly, the Provision Fund is a savings preparing the employees’ retirement to which the employee is contractually entitled. For staff included in the year 2000 Snapshot, the Provision fund must be paid on an actual basis, the amount being included in the Lump Sum Grant, until the employee leaves the NGO. However, the Provision Fund under the LSG calculations does not change “irrespective of whether they remain in the same post”[6]. If a member of the 2000 Snapshot leaves, the amount of the grant that would have gone towards their provision fund is replaced by 6,8 % of the average salary for their position for the next year.

Finally, LSG is not the only source of income for NGOs who can retain donations as well as income derived from other activities. Only income derived from fees will be deducted to the LSG amount allotted to the NGO.

LSG surplus management
Unspent LSG will be kept by the NGO in a separate Reserve Fund and declared to the authorities if it represents less than 25% of the NGO yearly operating expenditure, which the LSG is supposed to cover. Above 25% it will be refunded back to the SWD. Fueling the NGOs reserve is thus one of the main interests  of the LSG for NGOs that generally use it for “future employee compensation  and benefits and operating costs '' and to plan for contingency ahead.

Implementation in 2001
The Social Welfare Department implemented the Lump Sum Grant Subvention (LSGSS) in 2001, in order to provide subvention to Non-Governmental Organization (NGOs) for operating welfare service. This reform has been made to simplify the bureaucratic government input. The system, called at this moment the “Block Grant System”, was beforehand highly criticized, because the government controlled the input, which imposed standard staff structures, the level of payment, the staff quality etc. However, there was no control over the output, making it challenging to assess the effectiveness and impact on the funded programs, raising concerns about accountability and efficient use of public funds. This establishment didn’t encourage innovation to adapt more to the community needs, as creating more effect on the resources or a better serving of the clients. It leads to an unequal distribution of resources, with larger and more established organizations having an advantage over smaller or newer ones. The lack of flexibility under the Block Grant system was penalizing: the funding the NGOs received was decided through annual grants, which limited their ability to change community needs and adapt their program and service. It created an administrative burden, due to the required submission of detailed financial reports and accountings for every expenditure. It was overly bureaucratic, time consuming and resource intensive for NGOs and Government.

In 1994, the government appointed consultants to review the subvention systems, with the aim of changing from an input to an output control. This group of consultants met NGOs, attended media programs and reviewed the program weekly. This consultation ended in 1998, and began to be implemented in April 1999. All the funding introductions were raised in October 2001.

After the reform creating the Lump Sum Grant Subvention, some points have been discussed and changed. The administration decided firstly to allow more time to the NGOs to adapt to the new decisions and changes, from three years to five years. They will however continue to demonstrate that the provision isn’t adequate to cover the projected salary regarding their contractual obligations. It is also planned to provide practical assistance to NGOs through seminars on management and the development of self-help kits, to allow a greater central administrative support. NGOs will receive sufficient resources to meet their contractual commitments, to reduce the impact on the quality service, even if the change will be light. To reduce the risk of abuse of subvention, NGOs will be required to comply with certain accounting and financial reports.

All of these reforms are considered as a tool used to achieve their prime goal: ensuring what the 2001’s welfare needs, by giving to the community the flexibility they required.

Review in 2008
During the summer of 2007, protests of the union of social workers broke out across the city in response to the LSGSS which unions considered obsolete. The main grievance was the drastic reduction in salaries and the increase in turnover rates of social workers due to the new system. This affected the welfare sector in Hong Kong, placing it in a scarce position as more NGO reduced their actions due to a lack of staff and negative incentives such as low wage to attract. Therefore, the Hong Kong government and SWD appointed a new independent institution, the Lump Sum Grant Independent Review Committee (IRC), to conduct an impartial and transparent investigation.

In the 2008 review, IRC concluded that the current system should be maintained because a return to the pre-2001 integral social welfare system was not desirable for stakeholders and the SWD. However, it was to undergo severe modifications leading to the IRC formulating 36 recommendations, all adopted by the Hong Kong government during 2008. Among the most notable, there are:

1. The Government should make available an actuarial service for NGOs to assess their ability to meet Snapshot Staff commitments.

2. NGOs should also utilize their reserves effectively, such as by improving staff remuneration packages and supporting staff development initiatives.

3. The Social Welfare Department should conduct a thorough review of its audit procedures to ensure their effectiveness in monitoring the use of public funds without compromising the flexibility of NGOs.

4. The government should establish a social welfare development fund worth $1 billion to support training, capacity enhancement initiatives, and studies aimed at improving the service delivery of NGOs.

5. The SWD should collect data on staff turnover and wastage rates for the purpose of monitoring the sector’s overall manpower position

6. The Lump Sum Grant Steering Committee should collaborate with the welfare sector to develop a best-practice manual for NGOs, focusing on management issues.

7. The government should establish a review mechanism to oversee the systematic evaluation of welfare services.

Review in 2021
In 2021, the Government of Hong Kong conducted a comprehensive review of the LSGSS after 20 years of implementation. The review aimed to adapt the system to the changing times and address emerging needs. A Task Force, chaired by the Director of Social Welfare and comprising representatives from various sectors, conducted extensive consultations with stakeholders, including Legislative Council Members, NGOs, and community members.

The review identified several major issues and made 30 recommendations to enhance the LSGSS in five domains: quality of welfare services, staffing establishment and subvention benchmark, financial planning, relevance of utilizing LSG subvention, and accountability and corporate governance of NGOs.

Overall, it is recommended to establish a learning platform for NGO governing boards and senior management, maintain the subvention benchmark at mid-point salaries, improve the management of the Holding Account, establish criteria for the utilization of LSG subvention, and ensure accountability and corporate governance of NGOs, with the responsibility of monitoring and providing advice on implementation resting with the Lump Sum Grant Subvention Committee (LSGSC). The government promised to consider these recommendations to improve the LSGSS and ensure its effectiveness in meeting the evolving social needs of Hong Kong.

Criticisms and Controversies
The “Controversy and Criticism” section of the Wikipedia page of “Social Welfare Department” discusses three major issues regarding LSGSS: Financial Monitoring, Self-assessment of service quality by NGO, and Governance and management matters. Four more controversies are identified in this entry.

Performance Assessment
The Performance Standards in the FSAs were established under the Service Performance Monitoring System in 1999, which include Essential Service Requirements (ESRs), Output Standards (OS), Outcome Standards (OC), and Service Quality Standards (SQS). ESRs specify the basic infrastructure for services, such as the number of opening hours. OS and OC measure service volume (e.g., number of cases served) and effectiveness of services (e.g., rate of satisfaction), respectively. Finally, the 16 SQS, each elaborated by a set of criteria and assessment indicators, set out guidelines for service provision, such as transparency, efficiency, respect for confidentiality, etc.

The establishment of the Service Performance Monitoring System, later became the basis of LSG subvention, is “a catalyst for the enhancement of corporate governance in the welfare sector”. A HKCSS survey showed that by 2005, 87% of the NGOs established a formal performance management system to monitor staff performance. This changed the basis of service provision from contractual agreement rather than mutual trust in the past, which is a highly controversial aspect of the LSG. For instance, Cheung Chi-wai, the Vice President of the Hong Kong Social Workers’ General Union (HKSWGU) criticized the managerial mindset of KPIs for contradicting the human-centered principle of the social work profession. That is, because of the LSGSS, priorities of the NGOs have shifted from “caring for disadvantaged communities, solving the problem of wealth disparity, providing the elderly with care, and allowing young people to grow up healthy,” to managing high social worker turnover rates due to low morale and low wages. While LSG emphasizes autonomy, the constant evaluation also gives NGOs pressure to please the government, who is in ultimate control of the standards.

Accountability
If an ASU of an NGO is found to be underperforming, the NGO needs to submit a detailed action plan for improvement to the SWD. If an NGO fails to improve after repeated efforts, the SWD will withdraw its LSG for the ASU in question. These measures aim to ensure the accountability of NGOs, but evidence suggests that their effectiveness is far from ideal. Firstly, some NGOs fail to comply with performance standards but are undetected by SWD. For instance, the Audit Commission’s report found an NGO that reported the completion of a training program while only finishing 10% of it. Some NGOs use the subvention resources for activities unrelated to the service area defined by the FSA without SWD’s notice or approval. This can be attributed to the inadequacies of performance visits of SWD, which relies on NGOs’ self-assessment that might produce overstatements. Audit commission found that 20% of the NGOs had never been visited by the SWD, while the service users interviewed by SWD staff were pre-selected by the ASUs. Secondly, even when SWD is aware of the persistent underperformance of NGOs, there is a lack of action taken. The Audit found that, in the period of January 2001 to September 2017, out of 20 ASUs that underperformed for 5 executive years, 14 received full LSG subventions nonetheless.

Public Finance
The money allocated to the SWD and, thus, LSGSS, is taken from the Government revenue or debt, and is subject to changes in fiscal policy and public finance directions. Emphasizing financial prudence and fiscal discipline, there is a constant anxiety of the Hong Kong Government regarding the increasing of social welfare expenditure. The amount received by NGOs through the LSG system has increased since its first years, going from 6.3 billion on average in 2007-2008 to 12.5 billion in 2016-2017.

In 2022, as public expenditure reached 32%, the Government indicated that “the overall recurrent expenditure for the coming financial year would have to be cut by 1%”[1]. Consequently, NGOs on average lost 1.22 million HKD in LSGSS, promoting widespread concerns as “the existing resources and manpower of these NGOs have already been in acute shortage”. In other words, in the difficult times, there is a conflict between the underprivilege groups who require special and extra services, and the long-term financial sustainability of Hong Kong.

Impact on Service Delivery Quality
The previous system reimbursement for actual expenses, where there were rigorous reviews for everything from staffing to salaries to individual expenditures, was criticized for its lack of flexibility and autonomy and its high administrative burdens. From a governmental perspective, encouraging NGO autonomy and pushing NGOs to “reduce resource dependence,” might appear to be implicit push factors for increased innovation to optimize service delivery. In practice, this autonomy has left NGOs free to determine salary levels and the aim to “ensure the efficiency, economy and effectiveness of the welfare expenditure,” has instead been termed “the sinister of all evils in the social welfare sector.”[5] Mrs Anson Chan, former Chief Secretary for Administration, said that “we are looking critically at the way in which we manage and deliver services and I urge the subvented welfare sector to do the same.” But instead of examining service delivery, many NGOs have used their autonomy to determine salary level and have created a “fat on top and slim at the bottom” financial structure, with frontline workers receiving “unequal pay for equal work.”

The SWD released over 80 “Review Reports on Salary of the Top Three Level Staff” of local NGOs, which showed that the annual salary of senior executives accounted for more than one-tenth of the organisation’s salary expenses in more than ten NGOs. Contrastingly, 40% of social workers said that their starting salary is lower than those of the same rank in the SWD. The Social Welfare Association said that, “low wages will seriously affect the attraction and retention of talents in the social welfare sectors.” The effect on career attraction, coupled with high turnover rates and the “wave of retirements,” results in a severe decrease in manpower which leaves remaining social workers ‘stretched thin’ to fill the void. This leads to inevitable burnout and low morale which, in addition to the deficit of manpower, negatively impacts service delivery quality.

Furthermore, the fixed funding allocation is outdated as it is based on the 2000 benchmark of mid-point salary. This has only worsened social worker benefits further and has led to “the loss of high-quality talents in the industry.” The outdated benchmark for funding, which does not change with increases in hiring, organizations use “personnel turnover” budget control methods. This includes laying off social workers who have higher labour costs or longer tenure, and delaying recruitment. This is worse for smaller organizations who do not have the room to delay cutting costs.

When the value of frontline staff is overlooked, and they are underpaid but overworked to fill industry voids created by the unequal salary distribution, a wholehearted devotion to social service becomes an impossible task. Consequently, as community demand for social workers and their efforts increases, the service which those who are left provide is understandably poor.