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Subvention Mechanisms of Non-profit Organizations Term Paper

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Overview of NGOs

Non-governmental organizations are a form of social enterprises. These can be defined as revenue generating businesses, which perform social functions and achieve social changes by using business principles (LCS, social enterprises, poverty alleviation, and long-term care of the elderly in selected places p.2).

These organizations are usually regulated by various organs of the government depending on each country (Social Enterprises, Poverty Alleviation and Long-Term Care of the Elderly in Selected Places 2). They are usually accountable to the arm of government, which provides services similar to the services they offer. Most of these services complement the services provided by social services department of most governments. Social services provided by non governmental organizations usually target

  • The aged
  • Women
  • The disabled
  • Ex-offenders
  • The disadvantages

Since the above services complement the services performed by governments and most governments have subvention mechanisms to the NGOs, they are in essence performing the services, which would otherwise have to be performed by the social services department of the government. These may be in the form of

  • Tax benefits either in the form of reduced tax or tax exemption
  • Tax benefits to people who donate to the non profit organizations
  • Provision of management services
  • Public institutions prioritize the purchase of goods and services from organizations which offer certain social services
  • Funding may also be availed for projects undertaken by the social enterprises if the project will create employment to citizens.
  • Partial payment of the various types of insurance premiums, which the social enterprise faces
  • Subsidizing of labour costs (Social Enterprises, Poverty Alleviation and Long-Term Care of the Elderly in Selected Places 3).

The NGOs have various other modes of getting financial resources but their main source of funding is usually the Subvention mechanisms provided by the government.

Background of LSG

Earlier System of Subvention before LSG

In Hong Kong, the non-governmental organizations, which provide social welfare services, usually get government funding through Lump Sum Grant Subvention System. Prior to this system, the government used to reimburse the NGOs for the real costs incurred in the provision of social services. This system was known as the subvention system; however this system was said to be very “inflexible, complex and bureaucratic” (Lump Sum Grant Manual p3).

The earlier subvention system had awkward rules governing the reimbursement of expenses and in the selection of qualified staff. Furthermore, this system did not give incentives due to effective of resources so that the organization may have lower costs of running, hence have better value for money, and therefore improve on the available services. The NGOs were prevented from flexibly using their money and could not keep the savings they have acquired.

This made them not to spend their money economically. These shortcomings made the government appoint a consultant in 1995 to review the social welfare subvention system so to counter the problems faced by the old system. The consultant recommended the introduction of a new Service Performance Monitoring System (SPMS) and a new subvention system, which later came to be known as the Lump Sum Grant Subvention System (LSGSS) in January 2001 (LCS14-1).

Reasons for implementing LSG

The main reasons for the implementation of lump sum grants are usually to improve accountability, cost effectiveness and provide supporting mechanism to enable the NGOs meet their goals. The LSG also encourage management based on mutual trust.

LSG overview

Mode of subvention

In the Lump Sum Grant system, financial assistance is offered as reimbursement for the cost of running these organizations. Reimbursement is made on rates and rents while the cost of salaries and related allowances, and other charges is made on a lump sum to the NGO. Hence the name Lump Sum Grant.

Other charges include cost of utilities, food, administration, repair, and maintenance, transport related costs, insurance and miscellaneous expenses (Impacts of the Lump Sum Grant Subvention System on the Subvented Welfare System 3). NGOs usually receive LSG for existing service units and for newly allocated service units (lump sum grant manual 5). Existing service units include the

  • Lump sum Grant Mode (as at 2000-01)
  • Unit Rate Subsidy
  • Model System
  • Modified Standard Cost System

Lump Sum Grant also consists of salaries and related allowances, provident fund, other charges and recognized fee income. Lump sum grant is usually credited to the NGOs at a specific time as agreed upon. The lump sum grant can also be revised from time to time (lump sum grant manual 10).

The amount of LSG that an organization can get is calculated using a method that takes into account the amount of money that the specific NGOs uses in respect of its salary and salary and related allowances, provident fund for its staff, other charges and documented earnings. Usually a ‘benchmark’ that corresponds to its staff costs is set to enable standardization of NGOs, which have similar service units.

The benchmark is set by the sum of the salaries of all the snapshot staff at midpoint on the civil service Master Pay Scales (MPS) (Lump Sum Grant Independent Review Committee 2008) as at 31st March 2000. Snapshot staffs are the number of staff who was on the known enterprises of the NGOs subvented service Units as at 1st April 2000. Their employment terms and conditions of their contracts are guaranteed as long as they remain working in the same NGO and have demoted or promoted to another level.

The provident Fund based on the actual snapshot staff and at 6.8% of the mid-point salaries of the known national enterprise of the unit, which is subvented for non-snapshot staff (Lump Sum Grant Independent Review Committee 2008). If an NGO has snapshots above the benchmark, the NGO is supposed to receive the snapshot as LSG the moment they enrolled in the new subvention system.

To ensure that NGOs providing the same service units receive the same funding the LSG is reduced annually by 2% annually beginning from 2008-2009 (Impacts of the Lump Sum Grant Subvention System on the Subvented Welfare System 3). However, if the NGO has snapshots below the benchmark it would receive the benchmark as LSG if their activities had been wholly commissioned before the LSG came into force.

Service Performance Monitoring System

For proper utilization of the lump sum grant, an efficient service performance monitoring system (SPMS) was proposed. This system supervises the services undertaken by the NGOs and ensures that the NGOs do the work for which they have been funded. There must also be a system, which ensures that the NGOs provide high quality services as demanded by the people concerned. This is usually achieved through the Funding and Service Agreements (FSA) and Service Quality Standards (SQSs) on each unit, which is subvented.

FSA is on the view that the NGO will provide social services through required performance standards. Performance standards are measured in form of output and outcome whereby, output standards refer to the quantitative measures of the main activities, which relate to the provision of a certain service. In addition, outcome standards measure the efficiency of the service provided. Moreover, SQSs show the quality that the NGO’s subvented service units are supposed to achieve.

The NGOs are supposed to strive continuously to improve their services; and should therefore submit a service improvement form from time to time. The government can withdraw the subvention if the NGO if it fails to improve on its services. To standardize the level of funding to NGOs, which had the same type of service units, a benchmark was introduced to calculate the personal emoluments portion of the subvention.

Support from the government

LSG Steering Committee

The government also provides support for the efficient implementation of the LSG. A lump sum grant steering committee (LSGSC) is set by the government to monitor LSG implementation. This committee comprises of NGOs management, representatives of staff unions, and consumers of the services offered by the NGO and Social Welfare Department representatives. The main function of the LSGSC is to oversee the use of the LSG and come up with solution to any arising problem.

Tide Over Graft and Special One-off Graft

The government also provided a Tide Over Graft (TOG) for five years and a Special One-off Graft (SOG) to guarantee NGOs funds required to meet the commitment in contracts they had made with of snapshot staff.

TOG enables the NGOs to meet the salary requirements of snapshot staff whose salary was more than the salary of that group according to the LSG (LCS 14-4). This provided enough time for the NGOs to conform to the new funding system through restructuring of its organization and reengineering its services.


The government also facilitates training of the staff and members of the board of NGOs to improve on their governance skill (Chan 69).

Condition set for NGOs to get LSG

For the efficient implementation of the LSG, the NGOs are required to have sound and transparent management and financial systems to ensure proper use of Lump sum grants.

The NGOs are required to keep accounting records concerning all financial transactions using sound accounting procedures. The NGOs should clearly show how the LSGs and income from other sources is used. The NGOs are also supposed to keep a record of their staff remunerations. They should also show how the staffs who offer exemplary work are rewarded. The NGOs must have a mechanism of training of its workers to equip them with knowledge necessary for them to effectively perform their duties effectively.

The management must also devise ways of improving its relation with the exiting staff to improve their loyalty and improve their motivation. The NGOs should provide record of all fixed assets. The NGOs are also supposed to submit their annual financial reports, which have been issued by external auditors. They are also supposed to issue completely audited financial report of the NGO. The external auditors should be from an organization, which is recognized by the government.

The government also does inspection of the subvention from time to time to determine the performance of the NGOs and the systems, which the NGO has put in place to ensure proper management and utilization of the LSG. The government can also advice the NGO on the improvements it require to take so as to improve on its existing systems (Lump Sum Grant manual 7)

Positive Impacts of the LSG

Normally, there is a lot of flexibility and autonomy given to the NGOs in the management of the subvention funds under the LSGSS. In this case, the government relaxes its control on the NGOs allowing them to effectively pursue their welfare operations through corporate governance (Lump Sum Grant Independent Review Committee, 2008).

Secondly, through their corporate governance, the NGOs provides comprehensive one-stop services where all the targeted service users can access all services at a localized service point; thus saving on costs and avoiding cases of duplication in service delivery.

Thirdly, since NGOs are relatively self-sustaining and independent, and usually engage sound financial management for the benefit of the community, thus they deliver their welfare services at cost-effective manner and enhanced corporate governance.

In addition, since they are self-regulating, they are able to deploy their human resources to areas that they feel community needs will be met effectively. Moreover, through the use of LSG and less reliance on government funding, they are usually motivated to seek other ways of raising funds to sustain their philanthropic activities.

Fourthly, accountability of service allows the community to benefit from LSG. Normally, subvented NGOs operate under the watchful eye of various standard bodies such as FSA, SWD and SQS.

For instance, they are accountable to the SWD for quality of service (Lump Sum Grant Independent Review Committee, 2008); while on the other hand, FSA outlines the type of social welfare services to be provided and the required performance standards in terms of quality, performance output as well as essential service requirements. Moreover, SQS sets standards level of quality that each of them must attain in order to continue operating under the subvention system.

Negative Impacts of the Lump Sum Grants

The lump sum grant faces very many different challenges its implementation. Due to the structure of the Lump sum grant, most NGOs employ its workforce on contract basis. Most of the workers (84.4%) were employed on contracts, which did not exceed 24 months (Impacts of the Lump Sum Grant Subvention System on the Subvented Welfare System 9). This made the workers to be unable to plan for their careers on a long-term basis.

The employment on contract basis made the employees lack morale, a sense of belonging towards their employers and usually they were not dedicated to their work. A high number staff left their work within a year leading to wastage of skills, which the workers had acquired. This ultimately affected the quality of the services offered by the workers.

Some NGOs do not use the extra funding, which the government provides to increase the salaries of their staff as civil service demands. They use the extra funding on other activities instead of using the funds on staff that are in subvented services.

Another challenge is the inability of the government to provide funds to support training of staff while in service. This ultimately leads to decline in the quality of services offered by the NGOs (Review Report on the Lump Sum Grant Subvention System 4).

There have also been complains that the staff who work for the NGOs are given less pay compared to the workers of the social welfare department. This is despite the fact that they perform equal work. This is because of the unfair pay policies of the Lump Sum Grant policies (Review Report on the Lump Sum Grant Subvention System 5).

The government requires that NGOs contribute 20%of the amount required to undertake a project. However, some NGOs experience difficulties in contributing the 20%. This may hinder the implementation of the project (Review Report on the Lump Sum Grant Subvention System 8).

Flexibility offered by the LGS may make some NGOs misuse it especially concerning the management of human resources since the government is not able to monitor them effectively. Some NGOs are also not transparent in revealing their financial information especially the salaries and allowances offered to their senior members of staff.

The service performance monitoring system is also said not to effectively measure the performance of the NGOs. It mostly measures the performance of the NGOs in terms of the number of services that they offer instead of measuring the performance in terms of the outcome of the services that the NGOs offer. Outcome of the services is the one that truly show the quality of the services offered (Anheier 290).

Since the introduction of the LSGSS, there has been an increase in the number of services where fees are charged. The LSGSS recognizes this as a means of income for the NGOs. However, these fees and charges may lead to ineffectiveness of the services to the users if the conditions of the LSG manual are not adhered to.

The NGOs claim that they have been unable to honor some of the contractual commitments to snapshot staff after the termination of the TOG and the SOG. They are therefore forced to restructure the staffing structure and accumulate more reserves in order to tackle the obligations (Impacts of the Lump Sum Grant Subvention System on the Subvented Welfare System 4).

Due to inflation, some NGOs are experience difficulties in meeting the cost of ‘other charges’. ‘Other charges ‘subvention is based on past data and is not updated regularly to cater for inflation. This forces the NGOs to devise means of cutting costs, which sometimes compromise on the quality of the services that they offer.

Implications of the lump sum grant on management of NGOs

Manpower Planning

Due to the strict conditions set by the government on the management of the NGOs in order for them to receive lump sum grants, administration in these organizations has improved. The NGOs have made vast improvements in their management. There has also been an improvement in the staff recruitment of the NGOs.

This is usually done in a transparent manner as stringent measures have been put in place to ensure that transparency. Rewarding of high performance enables the NGOs to improve on the quality of the services they offer. (Impacts of the Lump Sum Grant Subvention System on the Subvented Welfare System 4) the NGOs are

Provision of LSG also encourages the NGOs to look for other alternative sources of funding to fund their services. This may be in the form of engaging in provision of paid services through collaborations with private enterprises. This collaboration reduces the over dependence on the government funds and hence enable more private enterprises to engage in the provision of the social services to the general population (Ricketts 404).

Relationship with the field

Most subvented NGOs operating under LSG are always in conflict with the SWD due to the fact that, the latter is always strict on matters relating to accountability and corporate governance, while the former has the feeling that the latter does not have adequate strength to resolve issues impartially and effectively.

In this case, NGOs feel that there needs to be an independent body comprising of the stakeholders and independent members of the community to handle complaints and other issues related to performance of the subvented NGOs. In addition, there are roles that the NGOs feel the SWD should aggressively play in order to enhance their relationship such as manpower development, welfare planning and review of service needs.

Financial Management

Lump Sum Grant Subvention System allows NGOs to keep unspent funds in a reserve. These funds are for enabling the NGOs settle any liabilities, which may occur in future. However, the NGOs are disallowed to retain any reserve, which exceeds 25 % (excluding provident fund and interest earned). Any amount of money above the 25% limit must be returned to the government in the financial year, which follows.

However, an NGO can retain more than 25% if it gets permission from the Director of Social Welfare (DSW). It will have the discretion of using the funds on any of its recognized services. However, reserves of the provident fund are solely used Provident Fund activities (Lump Sum Grant Independent Review Committee 2008).

Impact on quality of services offered

The lump sum grant has led to the improvement of the quality of services offered by the NGOs. This is because the NGOs are required to continuously strive to improve their services for them to continue getting the lump sum grant. This ensures that the NGOs will always provide high quality services (manual).

In addition, the government does regular inspections of the NGOs activities (Corruption Prevention Department 4). The lump sum grant also allows for flexibility of the programs offered by NGOs as long as the initiatives would lead to the improvement of the services offered by the NGOs.

Improvement in quality of the services offered

For the implementation of the LSG, the NGOs are required to efficient financial accounting systems and must have external auditors. This is to promote sound management and corporate governance (Ingraham and Lynn 13).

Since the lump sum grant requires that NGOs continuously provide a report on improvement of quality of their services, this promotes better use of their resources for provision of high quality services (Impacts of the Lump Sum Grant Subvention System on the Subvented Welfare System 14).


Due to the current economic and financial crisis government are forced to cut on their expenses. The expenses that are mostly targeted by the governments are the social services expenses. This will adversely affect the amount of funds available for subvention of welfare services. The funding from private enterprises to NGOs is also getting more and scarcer. The enterprises, which are willing to provide the funds, would also like to see more results. Lack of funds prompts the NGOs to cut on some of their activities.

This also forces the NGOs to rely more on the lump sum grant subvention provided by the government. However, with more reliance on the LSG comes greater restriction and supervision by the government since the government would like to see more results achieved as less funds are available. Lack of funds will also leads to a reduction of the NGOs accumulated reserves as they use them to meet some of their unavoidable expenses and save less money.

Works Cited

Anheier, Helmut K. Nonprofit organizations: theory, management, policy. NY, Routledge. 2005

Chan, Terence. “Sources of Funding and Monitoring Effects on Nonprofit Organizations from an Agency Perspective.” Asian Review of Accounting, Vol. 5 Iss: 2, pp.66 – 77. 1993.

Corruption Prevention Department. “Subvented Social Welfare Non-Governmental Organizations – Staff Administration.” Subvented Social Welfare Non-Governmental Organizations – Staff Administration. 2000. Web.

Legislative council secretariat. 2007. Web.

Ingraham, Patricia and Lynn, Laurence. The art of governance: analyzing management and administration. Washington, Georgetown University Press. 2004.

Lump Sum Grant Independent Review Committee. “Review Report on Lump Sum Grant Subvention System.” Review Report on Lump Sum Grant Subvention System. 2008. Web.

Lump Sum Grant Manual. “Social Welfare Department: The Government of the Hong Kong Special Administrative Region. 2000. Web.

Legislative council secretariat. 2008. Web.

Ricketts, Martin. The economics of business enterprise: an introduction to economic organization and the theory of the firm. London, Edward Elgar Publishing. 2003.

Legislative Council Secretariat. 2009. Web.

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