The New Public Management reform of state-funded social service nonprofit organizations and the changing politics of welfare in Hong Kong

The formation of the old social pact in the late colonial era

It has been well documented that the early colonial state played only a marginal role in social provision. It was not until the early 1970s that the late colonial state started to assume a more active role in social programs after the two social riots in the late 1960s, which reflected widespread social discontent (Jones, 1990; Tang, 1998). Through this expansion, the state became substantially involved in the financing and provision of public health care, public housing, and social assistance (Lee, 2005a, 2005b). The expansion in education and social service was made possible through heavily funded NPOs, which had a long history of being the major provider of such services. Although the total public expenditure on social provision (in terms of percentage of GDP) was still low by Western standards, social spending has constituted a significant portion of the total public expenditure since the early 1970s. ³ The heavy state involvement in financing and provision (rather than mere regulation) ⁴ of social programs warranted the characterization of the regime as a residual welfare state (Lee, 2005a). Given the economic noninterventionist and conservative financial policy of the colonial state, such expansion in welfare spending was financed mainly through continuous economic growth, which allowed for an increase in public revenue through taxation. The result is a peculiar East Asian welfare system that stresses self-reliance and familialism yet substantially involves the state in the financing and provision of social programs under a financial policy of low tax rate.

The statist-corporatist governance regime, the agencies of NPOs, and the old politics of welfare

It was in this stage of rapid development of welfare that social service NPOs became heavily funded by the colonial state. Indigenized voluntary agencies (that were previously international NGOs serving in Hong Kong), old church organizations, Chinese voluntary associations, and self-help groups were incorporated into the state’s funding regime (Lee, 2005a). In the two decades that followed, state-funded social service NPOs have played an active role not only in the provision of social service, but also in shaping the policy of social care and promoting the development of the civil society. The very possibility of these multiple roles was closely related to the particular governance regime formation that configured the relationship between the state and the NPOs. Specifically, a statist-corporatist governance regime was formed that entailed a combination of hierarchical control by the state and a corporatist relationship between the state and the nonprofit sector. It is statist in the sense that there is tremendous state dominance in the relationship through the official discretion they have in funding selected associations. It is corporatist in the sense that the NPOs were officially represented by an umbrella organization through which the state engaged the nonprofit sector (Lee, 2005a). Under this arrangement, NPOs assumed multiple roles as state agents, political agents, and societal agents. ⁵

As state agents, NPOs provide 90 percent of Hong Kong’s social service under heavy state funding. For many of them, over 90 percent of their funding may be obtained from the government. The SWD decides which NPOs should receive state funding based on the types of services needed by the state. Such authority allowed the state to exclude NPOs whose missions and values were not agreeable to the state, especially organizations that were deemed too radical (and, hence, threatening to the colonial state). The Standard Unit Cost Model was the dominant model used by the government to benchmark the funding level of eligible NPOs. The model was input- and historical-based, and itemized budgeting was practiced. Members of the NPO staff were paid at the same level as civil servants of equivalent grades. Thus, NPOs were quasi-public in nature and functioned practically as an extension of the bureaucratic arm of the government.

Such a funding arrangement operated by an autocratic colonial state would have restricted the autonomy of NPOs if not ensured their total subservience to the authoritarian state. However, NPOs were able to exercise some degree of political agency through being engaged by the state in policy making. The historical role of international NPOs in pioneering large-scale charity work and the networks formed among them laid the foundation for a collaborative relationship between the state and the nonprofit sector. The Hong Kong Council for Social Service (HKCSS), formed in 1947 to coordinate the relief work of the various NPOs, was the umbrella organization for social service NPOs. In the 1970s, when the colonial state expanded its funding to NPOs for the delivery of social service, the HKCSS lacked expertise, and was dependent on the nonprofit sector for policy advice. This provided the opportunity for the nonprofit sector to exercise its political agency. The HKCSS enjoyed some consultative status and was officially regarded as a ‘partner’ of the government in making social welfare policy. Beginning with the 1973 White Paper on social welfare development (entitled Social Welfare in Hong Kong: The Way Forward), the HKCSS was actively engaged by the colonial government in developing five-year plans in social service and the initiation of new social service programs, such as rehabilitation, family, youth, and elderly services (HKCSS, 1987). It often served as the forum for deciding which NPOs would take up what kinds of services (and, thus, receive funding from the government). As an example, in 1977, the Neighbourhood Level Community Development Project (NLCDP) was set up by the Committee on Neighbourhood Level Community Development Projects comprising representatives of NPOs and government officials to serve deprived areas (Ho, 2000). The HKCSS was entrusted with the selection of projects according to designated procedures (Wong, 1993a).

The autonomy of NPOs was also evident in the way they were able to exercise societal agency despite being heavily reliant on the colonial state for funding. In fact, the rise of social activism of social workers coincided with the expansion of the colonial state’s funding to NPOs. These state-sponsored NPOs became the arena in which young social workers sought to realize their conception of a just society. Their various services at the community level allowed them to permeate the grassroots and initiate community activism (Wong, 1993b). Notably, in the 1970s, social workers collaborated with housing movement activists and other community activists to launch campaigns that strove for the improvement of public housing facilities and other aspects of people’s lives. Disruptive and confrontational tactics were often used by these activists to advance their cause. The NLCDP was a state-funded project for serving ‘deprived areas’, such as squatter areas and temporary housing areas. It was supposed to counteract rising pressure group activities (Wong, 1993a). Instead, these projects attracted reform-minded social workers who organized their clients to use confrontational tactics as a way to arouse public awareness of their plight.

Wong (1993a) points out that the NLCDPs in Hong Kong, unlike similar projects in other places, were able to escape the fate of having state funding withdrawn when the social workers involved in the project were engaging their clients in contentious activities against the government. ‘Agencies with a social reform ideology could still run these projects with the support of state funds through the HKCSS, which had been entrusted with the selection of projects according to procedures agreed by the Hong Kong government since the inception of the scheme’ (1993a: 256). In addition, the colonial state tolerated these activities, knowing that they were safety valves for social discontent in the absence of a democratic system. In effect, Wong illustrates how under the statist-corporatist governance regime, dependence on ‘state funding does not necessarily lead to abandoning social reform’ (1993a: 256). On the contrary, ‘control and autonomy of state-funded social reform projects coexist’ (1993a: 257).

The politics of welfare development in the late colonial period made possible the emergence of this governance regime, as the state had to swiftly establish a welfare system to tackle social problems arising from rapid industrialization and urbanization. The limited capacity of the colonial state necessitated their engagement of NPOs as agents for delivering service and a partner in shared governance. The favorable financial conditions enabled continuous economic growth and provided for a situation of ‘growth politics’, in which the state could afford to fund NPOs relatively generously.

The dissolution of the old social pact in the postcolonial era

As mentioned, the residual welfare state was premised on a situation of continuously high economic growth in the 1970s. The sustainability of this residual welfare state began to come under strain in the 1980s, as socioeconomic development, economic restructuring, and rising expectations all increased the pressure for more social spending. The Asian financial crisis, which occurred right after the setting up of the Hong Kong Special Administrative Region (HKSAR) in 1997, signified the formal ending of the economic miracle and marked the watershed of Hong Kong’s social policy development. After three decades of economic growth, the Asian financial crisis brought about unprecedented economic recession, a record high unemployment rate and budget deficit. The end of the economic miracle destroyed the very conditions for the viability of the residual welfare state.

The crisis exposed the inadequacy of the residual welfare state on all fronts, including the lack of a more comprehensive social security system that would meet the needs of a postindustrial society and the challenge of economic globalization. The inadequacy might have called for a comprehensive review of the present system of social provision and its mode of financing, with a view to upgrading the residual welfare state to a more institutionalized welfare state. Indeed, that was the response of Asian countries such as South Korea and Taiwan (Kwon, 2009). For Hong Kong, instead, the postcolonial state was convinced that it should stick to its inherent policy of financial conservatism. Budget cutbacks and retrenchment of the residual welfare state were instituted as a way to tackle the crisis (Lee, 2005b).

The New Public Management reform and the impact on the agencies of NPOs

In 2001, a set of new funding and service monitoring mechanisms were officially launched. In place of the Standard Unit Cost model, the Lump Sum Grant System (LSGS) was adopted by the SWD, giving a block grant to each NPO and the full autonomy to use it for staff, equipment, and other general expenditure. Staff rank, salaries, and benefits previously linked to the civil service scale are now delinked such that each NPO is free to offer its own remuneration package. To create market competition among NPOs, the SWD is also opening new services to competitive bidding among them. Limited areas of services such as homes for the elderly are also open to bidding by business corporations. To monitor the performance of NPOs and ensure accountability, NPOs are required to sign a Funding and Service Agreement with the SWD stating the expected output, and to meet standards specified in the Service Quality Standard. ⁶

As mentioned, the official aim of the reform is to enhance the efficiency and effectiveness of managing NPOs through converting the funding system from an input-based system to an output-based one. Irrespective of the initial intent of the reform, the implementation of the reform measures coincided with the Asian financial crisis and the ‘dissolution of the old social pact’. From 1998 to 2003, measures were undertaken by the government to cut back on public spending. This included launching the Enhanced Productivity Programme in 2000 in which all public agencies were required to deliver 5 percent productivity gains in their recurrent expenditure between 2000 and 2002. In 2002, an official policy was announced to reduce public expenditure from 22 percent to 20 percent of the GDP by 2007 through imposing an across-the-board cut in the budget. Thus, as soon as LSGS were adopted by most NPOs in 2001, their management was faced with an environment of cutbacks. Under such circumstances, the reform measures, especially LSGS, became tools for retrenching and containing social service spending.

As a whole, the reform measures were tantamount to the introduction of a quasi-market (Le Grand, 1991) in the sense that although a market-like mechanism such as competition is introduced, NPOs remain heavily funded and regulated by the state (Means et al., 2002: 129–130). A high level of state dependency for resources coupled with the NPM reform measures result in the strengthening of the leverage for state control over NPOs. The impact can be further analyzed in terms of the impact on their role as state, political, and societal agents.

‘Privatized’ state agents: relinquishing public accountability

The new funding model compels NPOs to adopt personnel and financial management strategies that have significant implications for their role as agents of service delivery and allocation of resources to citizens. The new funding model brings financial uncertainty to NPOs, as funding may be cut because of an unsatisfactory performance rating, or erratic because short-term contracts may not be renewed. Older NPOs are also burdened by the obligation to honor the contractual agreement with long-standing staff who were hired before the implementation of the LSGS and whose remuneration still followed the old civil service pay scale and benefits.

To tackle these financial problems, almost all NPOs are now hiring new staff on short-term contracts, with lower salaries or even lower qualifications. Some try to further reduce staff costs through early retirement schemes, unpaid leave, or a freeze on hiring. All these measures commonly lead to a lowering of the staff-to-client ratio, if not the quality and qualifications of staff, all of which have a negative impact on service quality. NPOs are also exploring other avenues to generate new income, including stepping up their fundraising efforts, bidding for new service contracts, launching self-financed projects, and applying for funding from other sources. In reality, such income-generating measures have done little to alter the high-resource dependency of NPOs on the government. However, they have the negative consequence of draining valuable human resources from service provision to such operations. Organizations are also increasing their charges for service users and cutting back on free services. They are cutting back on resources that should have been deployed to serve the service users. As an example of the latter, it was reported that some NPOs providing a meal service to elderly people have switched to using cheaper ingredients. ⁷

In summary, by de-linking the employment conditions of NPO employees from the civil service, the state has essentially removed the public status of these employees. At the same time, these NPOs and their employees are now assuming the role of ‘privatized’ state agents. As they allocate public resources to the citizens using their service, they make decisions that are distributive in nature at their own discretion. Such privatized political power is now exercised without an adequate mechanism of public accountability, as the state no longer exercises any direct authority over the use of funding by these NPOs. Such loss of public accountability can be seen in the above case of cutting back on meals to the elderly: when the case was revealed, the Secretary for Welfare merely made a moral appeal to organizations to assume their corporate responsibility for the welfare of the elderly.

De-politicized agents: the loss of partnership status in policy making

The implementation of NPM reform measures in NPOs coincided with their loss of partnership status in policy making. Since the publication of the last White Paper on social welfare in 1991, the SWD has suspended the practice of making five-year plans in collaboration with the HKCSS, ⁸ essentially ending the corporatist arrangement that had hitherto allowed the nonprofit sector to make input into policy making. In addition, the new market mechanism makes it easier for the SWD to sidetrack the HKCSS. As the SWD now negotiates service contracts with NPOs individually, the HKCSS loses its intermediary roles, including the many situations in which they would affect how funding should be allocated for what kinds of service and to which NPOs. Competitive contracts prompt NPOs to see each other as competitors for funding rather than collaborators in broad social missions. The HKCSS loses its intermediary function, both among NPOs and between the government and the nonprofit sector. In summary, it is marginalized as the representative of the social service sector and the partner of the state in social welfare policy making.

Weakened societal agents: the erosion of networks and the strengthening of state control in policy making

Under the old corporatist setting, NPOs were able to carve out some space to exercise their societal agency and carry out advocacy work and community activism. As the SWD can now bargain with NPOs on an individual basis, it is in a more direct position to ‘reward’ NPOs that are docile and ‘punish’ those that are contentious. Thus, NPOs now feel more vulnerable to the power of the SWD and perceive that being on good terms with the government directly affects the resources they can obtain. There is also a common perception within the sector that obtaining new service contracts often depends on whether the NPO has a good relationship with the SWD. In a recent case that has become a major political incident, a social worker of the NLCDP in Tai O (a remote village in Lantau Island) organized local residents to deal with the aftermath of a serious flood in 2008. In the process, they criticized the Home Affairs Bureau for their incompetence in disaster relief. Their action was contested by the Rural Committee, which was a local body of the villagers dominated by conservative and pro-establishment elements. The Secretary for Home Affairs allegedly made verbal remarks to pressurize the management of the NPO. The social worker was then given a written warning by his NPO for failing to maintain a harmonious relationship with the government and was redeployed to serve in a different area. The social work professional community widely regards the incident as blatant political and managerial interference with the professional autonomy of social workers, and that it shows how anxious the management of some NPOs is to maintain a good relationship with the government under the new funding system. ⁹

The New Public Management reform and civil society development

NPM reform also affects the broader environment for the continuing development of the nonprofit sector. Since the 1990s, many new NPOs have proliferated. Studies show that close to 40 percent of social service NPOs were formed after 1990 (CCSG, 2010: 24). These organizations embrace a broad array of services, including the rights of the physically handicapped, sex workers, racial minorities, students with learning disabilities, cancer patients, AIDS patients, victims of domestic violence, victims of sexual violence, and so on. Many of their missions reflect the changing needs of a society that has been rapidly developing toward postindustrialism. These late-comers to the scene of social care are much less likely to obtain regular subvention from the SWD. They tend to be deficient in funding and rather small in size, with funding mainly obtained from international, corporate, and private donations, and intermediary foundations (CCSG, 2010: 25).

There are several plausible explanations for this. First, in a situation of limited resources, these newly established agencies can hardly compete with the more established organizations in terms of track record and connection with the government. Second, with the suspension of the five-year planning exercise and partnership with the HKCSS, there is no formal mechanism for the comprehensive planning of social service provision. The bureaucratic judgment of the officials of the SWD, rather than the input of the social service sector, plays the predominant role in determining which projects are to be funded. Thus, many of the new needs of the community may not be recognized. Third, as the SWD is offering new funding to services mostly in the form of short-term contracts, the younger NPOs naturally have little chance of being incorporated into the subvention system. Even in terms of contracts, they are in an unfavorable position to compete with the older NPOs. This situation is substantiated by a recent report published by an independent committee set up by the government. It shows that from 2000 to 2008, among the 236 new service contracts that were offered by the SWD, only three of them were offered to small NPOs (the category that most newer NPOs belong to) (LSGIRC, 2008).

Under these conditions, newer NPOs with service approaches that are not agreeable to the government are particularly vulnerable when competing for funding. A representative case is the Association Concerning Sexual Violence Against Women, which was set up in 1997 by a group of citizens who were concerned about gender equality and violence against women, and which provided a counseling service to victims of sexual violence. The agency has also been very active in advocacy work, including educating the public on gender equality, raising public awareness of the plight of the victims, proposing legislative change, and so on. One pioneering service it has developed is a project called ‘Rain Lily’, which entails setting up a crisis center that provides a 24-hour one-stop service to victims of sexual violence. ¹⁰ The association was able to jump-start their innovative project through short-term funding from the Hong Kong Jockey Club from 2001 to 2005. The project won an award from the HKCSS in recognition of its innovativeness. However, they were unable to obtain long-term funding from the SWD, which argued that a such service would have been covered by the existing funded family service. Under strong pressure from societal groups and politicians, the SWD finally agreed to fund a new project to establish a multipurpose crisis intervention and support center, and put the project up for bidding. The association regarded the SWD project as deviating from the original focus of their crisis center. Perceiving that the SWD had no intention of awarding the project to them even if they submitted their bid, the association declined to bid for the SWD project, which was eventually awarded to an agency regarded as being on very good terms with the government. ¹¹

Thus, NPM reform may act as a tool for the state to affect civil society development through allowing the state to unilaterally dictate the allocation of resources and exclude proliferating agencies with a progressive agenda. In the face of a more pluralistic demand for social care, NPM reform has not been conducive to such growth in pluralism.

The new governance regime and the new politics of welfare

The new politics of welfare is constituted by the desire of the state to contain social demand for expansion in social spending, which is exacerbated by democratization. At the same time, it needs to pacify rising social discontent and class conflicts. In the aftermath of the Asian financial crisis, there is a more permanent trend toward a neoliberal approach in social policy. Since 2005, the economy has bounced back and the government has been attaining a surplus budget every year. Nonetheless, the postcolonial state seems only more convinced that financial conservatism is the best remedy against any possible fluctuations brought about by economic openness. The fear of being marginalized by the rising Chinese cities also casts doubt on the city’s long-term economic prospects. Thus, the state is reluctant to commit itself to increasing social provision that would entail long-term recurrent spending. Extra social provision is committed only to one-off spending, such as giving out an extra month of social welfare stipend to eligible families.

Since the political transition in the early 1980s, the democratization process was arrested and today Hong Kong remains a semi-democracy. ¹² Its legislature (the Legislative Council) is now in part popularly elected, and the chief executive is officially selected by an Election Committee of 800 electors (the majority of whom are expected to nominate and vote for the candidate handpicked by the Beijing government). The absence of popular elections as a mechanism for choosing the government means that state actors do not labor under the uncertainty of losing their official positions in electoral competition and, thus, are not strongly compelled to be responsive to popular demands when making public policy.

At the same time, electoral competition in a situation of partial democracy still creates incentives for elected legislators to attack the government’s policy shortcomings as a way of gaining popularity. Opposition parties are motivated to collaborate with civil society groups, which may generate societal mobilization strong enough to exert serious pressure on the state to make concessions to public demand. Indeed, citizens and politicians are demanding more spending on collective consumption and are increasingly dissatisfied with the quality of social provisions that is out of phase with socioeconomic development. In some instances, societal mobilization has successfully pressurized the state to adopt major policy change. ¹³

On the one hand, confronted with the problems of a postindustrial society, the state does not have the will to upgrade its welfare system to a more institutionalized welfare state. On the other hand, concessions have to be made when political pressures generated by collective actions become insurmountable for the state. Under this situation, the strategy of the state is to maximize its flexibility and space for maneuver to pacify popular demand while maintaining control over spending.

The new governance regime as constructed through adopting NPM reform measures can be understood as a way for the postcolonial state to tackle the new politics of welfare. The measures, taken together, maximize the flexibility of the state and its space for maneuver when responding to rising demand on collective consumption. It does so through shielding the state from being accountable for the distribution of resources to the citizens who are the service users, helping the state to re-monopolize policy-making power, and reducing the mobilizing power of social workers. The financial flexibility afforded by the reform also allows the state to manage the rising and more pluralistic demand for social care. By excluding NPOs that are critical toward government policies from its funding, it also dampens the growth of civil society organizations that are capable of shaping the political consciousness of the citizenry.