The current subvention system

The level of financial support

2. Subvention funding is the source of finance used by the HK government through SWD to support the current expenditure requirements of approved social welfare service units. The Lotteries Fund, which is also administered by SWD, is used to meet their capital expenditure requirements.) Subvention is paid under a number of different sets of rules. These are known as the modes of subvention. The four principal modes are:

1. the modified standard cost (MSC) system
2. the model cost (MC) system;
3. the lump sum grant (LSG);
4. the unit rate subsidy (URS).

In addition, there are two further subvention schemes under which certain NGOs receive funding. These are:

5. the 5% subsidy scheme for aided day nurseries and day creches;
6. the Bough Place Scheme.

Finally, subvention is provided to support the needs of the NGOs operating more than 2 service units for central administration structures. This funding is regarded as supporting separate service units which whilst providing a different type of service are, nevertheless, funded under the normal rules of subvention.

3. The amount of financial support is calculated at the service unit level. This calculation us undertaken according to the provisions of the mode of subvention which applies to that unit. Generally, the service, which a unit provides, determines the mode under which it is subvented. In other words, all of the service units in each of the 89 separately identified services are normally funded under the same mode.

4. The different modes adopt different approaches to the provision of financial support. They are set out formally in the "Guide to Social Welfare Subventions" prepared by SWD. The rules under which the four modes operate are described in turn below. The key characteristics and differences are set out in table E1.

5. The descriptions, which follow, reflect the core rules of each scheme. NGOs are free to approach SWD for interpretation or relaxation of the rules in different circumstances. Practice and policy in Subventions Brach of SWD, which is responsible for administration of the rules, determines those rules on which the Department is prepared to exercise some judgement, and those rules whose application is, or should be firm.

6. The MSC mode is based on two principles.

1. It is input-based, i.e. it is defined in terms of the resources (inputs) that an NGO will need to acquire in order to deliver the service. The operation of this mode requires SWD to specify and subsequently to examine in some details the quality and appropriateness of the inputs for which an NGO is eligible to receive financial support. Eligible expenses are known as "recognised" costs.
2. It is a reimbursement system under which NGOs are repaid for the actual costs (as allowed by the rules) which they incur. Thus, the ultimate level of financial support can only be determined once the level of underlying costs have been reported and agreed NGOs do not have to meet the costs of the initial outlay from their own resources. Payments are made from government to fund costs as they occur. These payments are in the nature of advances subject to subsequent adjustment.

MSC is the preferred subvention mode of the HK Government. More than half of the subvented social welfare units is funded under this mode.

7. Under the rules of the mode, the inputs are categorised (in line with the Civil Service financial management pattern) into Personal Emoluments (PEs), i.e. salaries and related payroll costs, and Other Charges (OCs). The amount payable under these headings is reduced by the Recognised Fee Income (RFI). RFI arises as the results of charges levied by NGOs for services and at rates regulated by SWD. Other income, known as programme income, arises as a result of levying fees for activities, which are not regulated by SWD.

8. The Rent and Rates (R%R) charges incurred by NGOs are reimbursable at cost.

9. For PEs, a staffing complement known as the staff standard is set for each service. The standard is defined in terms of both numbers and grades. Although some grades exist in the NGO sector alone, most grades are those used in the Civil Service. In following this grading structure, NGOs adopt the Civil Service salary rates but, in justification for doing so, are required to apply the same conditions of appointment to each grade as applied in the Civil Service itself, and, in particular, the same minimum levels of qualification and experience. Employees in non-Civil Service grades are paid on salary scales which by agreement with the sector, are defined in relation to points on the Civil Service Master Pay Scale.

10. NGOs are given the freedom to depart from the staffing standard but this may affect the level of subvention. This is calculated as follows:

1. The staffing standard is cost notionally using the midpoint of the incremental Civil Service salary scales to generate a benchmark "mid-point provision"
2. If actual PE costs are below mid-point provision, NGOs are reimbursed in full.
3. If actual PE costs are above the mid-point provision they are only reimbursed in full if the staffing standard has been followed exactly in terms of numbers, grades and the qualifications of the staff; otherwise only mid-point provision is paid.
4. The excess funding above mid-point provision is known as supplementary subvention. On receipt of an application from an NGO for payment of this funding SWD is required to examine the qualifications and experience of all the staff of the unit. Making the application (from the point of view of the NGO) and processing it (from the point of view of SWD) is therefore a time consuming and tedious process.

11. Only salary costs and the cost of employers?contribution to the provident fund are recognised for reimbursement. The costs of any other benefits, including those paid to Civil Service staff in equivalent grades, are not recognised, i.e. they are not reimbursable.

12. The freedom for NGOs to make use of the funding up to the level of mid-point provision is a distinguishing characteristic of the MSC mode. It gives NGOs considerable flexibility to vary the grade mix and number of staff. Where the actual scale points of the staff of a fully complemented unit are relatively low, the NGO has headroom between actual payroll cost and mid-point provision. This can be used to fund the appointment of more staff or more senior staff than the staffing standard could ordinarily support.

13. In making use of this flexibility, however, the NGO needs to be conscious that, as staff progress up their incremental scales, the payroll costs will approach and, all things being equal, eventually exceed the mid-point provision. When this occurs, only the mid-point provision will be paid unless the staffing structure accords exactly with the staffing standard. The judgement to be made by NGO managers is whether the staffing turnover rate is sufficient to reduce the risk of subsequent difficulty thereby enabling them to take current advantage of the available funding/flexibility.

14. For Other Charges (OCs), three main restrictions are imposed.

1. There is a ceiling on the total amount of OC reimbursable for each unit. Units which incur higher levels of cost are not reimbursed above the ceiling; units which incur lower levels of cost are not allowed to keep the saving.
2. In some circumstances, a proportion of the overall OC ceiling is set aside to meet the costs of specific items. The cost of food for clients in residential care is an example. This ceiling is ring fenced and underspends are not available for use to meet the costs of other recognised OC items.
3. There are detailed rules, which define the categories of cost, which are and are not eligible for reimbursement. The balance of these rules and their focus in meeting the needs of subvented service units is not always obvious.

In addition, OC expenditure is subject to the restriction that no item of furniture, equipment, or repairs and maintenance may exceed $2,000.

15. Recognised Fee Income (RFI) is governed by a similar combination of rules

1. There is a minimum level of RFI set for a number of services. This is deducted from the subvention payable by SWD. Shortfalls in the income target are not made up by SWD. Excess income may be spent on recognised OC expenditure but is otherwise recovered by the SWD.
2. For some services, the income target is based on fee rates set by the SWD; for others it is based on historical precedent.

16. Rent and Rates (R&R) are reimbursed at cost.

17. Since the MSC system is based on the reimbursement of the actual level of costs incurred, surpluses only occur as temporary phenomena when either advance payments made by the SWD exceed the actual level of costs which are in due course incurred, or actual RFI exceeds budgeted RFI. Such surpluses are required to be transferred to a separate heading in the accounts of each service unit and to be held in a suitable interest-bearing bank account. They are eventually recovered (clawed back) by the SWD together with the accumulated interest. They cannot ordinarily be "vired" i.e. they are not available to fund deficits in other categories of expenditure or in other units.

18. The MSC system was developed from an earlier version, originally called the Standard Cost (SC) system and now frequently referred to as the true Standard Cost System. This was not a repayment system. NGOs were paid a lump sum incorporated the full mid-point provision. The level of actual PE expenses was not taken into account. The philosophy behind this approach was that NGOs should focus on outputs rather than inputs. The modification was introduced when it became clear that this level of funding was enabling NGOs to accumulate significant surpluses.

19. The MC mode was intended to be a temporary system for services prior to moving to the MSC mode. It is employed where a staffing standard for all the unites in a specific service has either not yet been agreed or, where agreed, not yet implemented, normally because there is insufficient funding to be able to do so. The staffing standards which apply to individual units are mainly based on historical precedent using either the unit's own structure in the period before it became subvented or, in the case of a new unit, the structure of a similar existing unit. For new units providing an entirely new service, the standard is based on negotiation between SWD and the NGO.

20. Over a third of the subvented social welfare units are funded under this mode.

21. The MC mode is similar to the MSC mode in many respects:

1. it is a repayment system based on actual costs;
2. it is defined in terms of inputs which are categorised into PEs, OC, RFI and R&R;
3. the detailed rules governing OCs, RFI and R&R are the same;
4. a staffing standard is set for each service unit subvented under this mode, though the same standard does not always apply to all service units in any one service, particularly where there are variations in capacity.

22. The principal characteristic, which distinguishes the MC mode from the MSC mode, is the extent of the freedom given to NGOs to depart from the staffing standard. The Guide to Social Welfare Subventions describes this flexibility in the MC system as "only limited to rank but not to number" This is interpreted mean that an NGO may appoint a member of staff to a different rank from that in the standard (subject to the proviso that the actual salary cost of the appointee does not exceed the maximum amount subventible for the post) but may not change the total number of subvented staff of the unit. By comparison, under the MSC mode, an NGO has complete flexibility to vary its staffing structure to make full use of the mid-point provision. This additional flexibility means that the MSC mode, as actually implemented by the sector, is more expensive than the MC mode even if the staffing standards are the same.

23. The origins of the LSG lie in the period before 1982/83 when all funding to social welfare agencies was based on a system of discretionary grants. As the name implies, the LSG is a set amount, which is paid to an NGO for the provision of a specified service. There are no constraints over the manner in which the NGO uses the funding. In particular, there is no staffing standard, no controls over the costs, which the NGO incurs, no specification of the split between PEs and OCs and no scrutiny of the eventual financial results. Nor is there any claw back of surplus nor topping up of deficit.

24. The amount of funding is set taking account of the expected level of income. It is adjusted only o take account fo the annual Civil Service pay increase and, exceptionally, in cases of financial need. Thus, although this approach is not strictly output-based, it has a significantly lower emphasis on inputs than either the MSC or MC modes.

25. About 10% of subvented social welfare units are funded under this mode.

26. The URS was introduced in 1991 and is the most output-oriented mode of subvention. A fixed unit price is agreed between SWD and the NGO. The funding for the NGO is based on the level of output, which it delivers. In addition, rent and rates expenses are paid separately and at cost. Like the LSG, there are no controls over the use made of the funding, no clawing back and no topping up. The unit price is adjusted annually to take account fo the Civil Service pay award, overall price inflation and changes in the expected level of fee income (which is based on a fee rate which the NGO itself has the freedom to set).

27. Payment of subvention under the URS mode is based on a formal agreement signed between the Director of Social Welfare and the representative of the NGO concerned. This is couched in terms which indicates the intended legal standing of the document.

28. Less than 1% of subvented social welfare units are funded under this mode. This may be partly due to the manner in which it was introduced. NGOs were given the option of adopting the URS for their subvented unites. However, because of the additional flexibility which the scheme clearly provided, the unit price was set at a level which effectively constituted a reduction in the amount of funding made available. In the light of this, very few NGOs have opted to adopt this mode of subvention.

(Extracted from Coopers & Lybrand (July 1995) Review of the Social Welfare Subvention System: Report of the Investigatory Phase of the Review (Phase A).)