I think these are two separate issues -
Firstly should the punter be given an opportunity to alter their bets if a horse is scratched at the start - I am all for this as it would give one the same opportunity whether a horse is scratched early or at the start.
Secondly there is the debate of what to do with bets placed on the scratched runner - not too sure what the best solution is here - the objective should be to give the punter the 'best possible replacement' but simply substituting the scratched runner with the tote fav is open to manipulation as stated - still I don't believe there is a 'better' solution - the suggestion of using the the fav (or second fav if the fav is scratched) AT THE TIME OF THE SCRATCHING appeals to me - however there may some practical problems with this