78. Under the new system, subvented social welfare services are placed into two categories for funding purposes. Included in the first category are services which are prescribed by law or clearly contribute to meeting( tatutory requirement, services which ensure that a fundamental human need is met, and services which are required in order to alleviate social problems generally recognized as of primary importance. Services in this category receive a subvention at 100% of the standard cost established for those services. Services in the second category receive a subvention covering only part of the standard cost or, if standard costs cannot be established, a lump sum grant. The subventions allocated to an organization for provision of a particular service are not "topped up" or "clawed back", although they are adjusted where there is an increase in standard cost following a regular review or a salary increase. If savings from subventions do accrue for any reason, the voluntary organizations are required to keep them in a separate account and they can only be used for specific services approved by the Director of Social Welfare.
79. Because the determination of standard costs for each service was expected to take time, the Finance Committee agreed to the adoption of interim arrangements whereby until standard costs were determined, subventions would be assessed on the basis of recognized expenditure adjusted for price increases but disregarding all income except fees. The estimated cost of disregarding income in 1982-83 was $31 million. In 1983–84 standard costs were introduced for the first batch of eight services, namely neighbourhood level community development projects, family life education, family casework, small group homes, foster care, school social work, pool bus for the elderly, and outreaching social work. (The outreaching social work was later taken off the list because of problems of under-staffing). It was found however, when preparing the 1983-84 estimates for these eight services on a standard cost basis, that estimated additional expenditure of $10 million was required. This was more than envisaged by the Finance Branch of the Government Secretariat and it was found that it was largely accounted for by the use in the calculation of the standard costs of the mid-point of approved salary scales whereas the majority of salaries actually paid were below mid-point. The additional costs however were accepted. The following year the Director of Social Welfare proposed the extension of the use of standard costs to an additional thirteen services, which would increase the expenditure in 1984–85 by a further $45 million, 26% more than what it would have been based on the interim arrangements of calculating the subvention.In view of the likelihood of further large surpluses in the voluntary organizations' accounts, the request was not approved pending a full review of the implementation of standard costs for the original eight services.
80. The Director of Social Welfare completed a review in October 1984 of the implementation of standard costs covering the full year 1983-84. The objective of the review was to see whether the use of mid-point salaries was a realistic yardstick for the calculation of standard costs, whether the "no clawback” provision should be rescinded and, as a corollary to rescinding the "no clawback” provision, whether the voluntary organizations should be allowed to keep only a portion of the surpluses. The results indicated that for the seven services still using standard costs, the standard costs adopted were on average 17% more than the actual expenditure by the voluntary organizations on these services. The main reason for this was the use of mid-point salaries, and the effect of the use of mid-point salaries was found to be most pronounced in the graduate rank of Assistant Social Welfare Officer which had a salary scale of eighteen points. With rapid staff turnover and expansion of services few of the Assistant Social Welfare Officers reached the mid-point of their salary scale. For these seven services the Director of Social Welfare estimated there was a surplus of $6.7 million during 1983-84. The Director felt that whilst it was undesirable for the voluntary organizations to accumulate large surpluses year after year, she considered it premature and impolitic to make radical changes to the system at that stage. To contain the high level of surpluses however the Director of Social Welfare has in granting the subventions for 1985-86 made a 5% reduction in the staff cost element of the standard costs and made conditional the subventions for posts that have not been filled. Whilst this will no doubt slow down the rise in the level of surpluses, it does not in my view present an effective solution to the problem.
81. A recent audit review of the position has confirmed the findings of the Director of Social Welfare and has indicated that for the two years 1982-83 and 1983-84, the introduction of the standard cost subvention system, including the interim arrangements, had brought about surpluses in excess of $26 million in the voluntary organizations' accounts.
82. Standard costing, as a means of management control, involves the determination by management of standards of efficient operation and the relevant necessary expenditure. However, for the standard cost subvention system, the use of mid-point salaries means that the standard costs obtained represent only a rough and ready measure and not the expenditure which is necessary to achieve efficient operation. It has resulted in substantial surpluses remaining in the hands of the voluntary organizations for which little use has been made to date and could well lead to Government financing inefficient operations.
83. Whilst the long-term solution must lie in more accurate standard costs in order to reduce the level of surpluses, I have invited the Director's attention to the example of the administration grant under the Code of Aid for Secondary Schools. The grant is used to meet the cost of administrative staff employed by the aided schools and is also assessed based on mid-point salaries and is paid as a lump sum to be used at the schools' own discretion. However, subject to a prescribed amount which the schools can retain as a reserve, the surpluses are recovered annually. The system apparently has the same flexibility as the standard cost subvention system but has the added advantage of ensuring that surpluses in the hands of the schools do not build up unnecessarily. I have suggested that the Director give consideration to this approach so as to reduce the amount of surpluses accumulated by the voluntary organizations.
84. Subventions to non-profit-making day nurseries. One of the services which is not subvented under the standard cost subvention system is the provision of day nurseries. In paragraphs 97 to 101 of my report for the year ended 31 March
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