Key Points From This Episode:
• Estonia’s advanced level of digitization, and what their e-Residency program is.
• Lauri shares what his professional background in the tech space consisted of.
• Similarities and differences between working in technology companies and working for government organizations.
• Factors that resulted in the Estonian government’s early embrace of the internet.
• How Estonia’s approach to electronic ID cards differs to most other European countries.
• Lauri explains the mechanics of an E-ID card.
• Estimated percentages of the Estonian population who make use of Estonia’s various E-platforms.
• Ways that Estonia ensures their e-Platforms are secure and their approach to privacy.
• How the Estonian government attracts talent to its technology department.
• Some examples which highlight the constraints of some traditional procurement processes.
• The value of working in different types of organizations.
• Challenges that come with the growth of an organization or department.
• An e-Government program that was drastically accelerated as a result of the COVID-19 pandemic.
• Two main reasons that people will sign up for the Estonian e-Residency program.
• The percentage of new businesses in Estonia over the past 3 years that are owned by e-Residents.
• How the government is going to determine whether or not the e-Residency program is beneficial to Estonia.
• Technology that underpins key public infrastructure in Estonia.
• Countries which are following in Estonia’s footsteps, and how Lauri feels about this.
• Lauri shares his opinion on the work being done by Propsera.
• How being an EU member affects Estonia’s e-Residency program.
Mark: Hello and welcome to the Charter Cities Podcast. I’m your host, Mark Lutter, the Founder and Executive Director of the Charter Cities Institute. On the Charter Cities Podcast, we illuminate the various aspects of building a charter city, from governance to urban planning, politics to finance. We hope listeners to the Charter Cities Podcast will come away with a deep understanding of Charter Cities, as well as the steps necessary to build them.
You can subscribe and learn more about Charter Cities at chartercitiesinstitute.org, follow us on social media, @cci.city on Twitter and Charter Cities Institute on Facebook. Thank you for listening.
Mark: My guest today is Lauri Haav, is the Managing Director of the Estonia e-Residency Program. Welcome to the show, Lauri.
Lauri: Well, thank you, Mark, for having me.
Mark: To start, can you describe the Estonia e-Residency Program?
Lauri: Sure, absolutely. Estonia was the first country to launch such a program. That was a bit more than six years ago, it’s actually going to be seventh birthday by the end of the year. Basically, the essence of it is in this country, we have everything rather digitized. We use digital signatures for a long, long, long time already, like proper ones, not the sign I leave you a pencil mark on a tablet somewhere, but a digital signature and all kinds of applications have sprung up from that, like E-voting and lots of other things. Six, seven years ago, we decided to start offering this opportunity or this possibility also to other nationals, not just Estonian citizens, pretty much anywhere in the world.
You live with some limitations, which we can talk about later in terms of distribution, but literally anywhere you live, you could apply and become an E-citizen of Estonia, and receive pretty much the same digital ID card as the citizens use, only that it doesn’t have a picture and it’s not the travel document for the E-residents.
Mark: Cool. So you started running this program within the last year, correct?
Lauri: Actually, I started in January. Yeah, it’s my – like I’ve been seven months here, pretty fresh from that perspective, but already getting the feel of it.
Mark: Cool. What was your background before, I guess, taking over this program? How did that lead you to do that?
Lauri: Yeah, so for the last, or actually perhaps 25 years almost, I’ve been in the tech and IT business in some shape or form. Back in 2003 I co-founded an E-commerce company right at the end of the dotcom bust, so it was like great timing, but we succeeded nonetheless. I was a co-founder there and took it from like three, four people with an idea to 100% company operating in 25 countries. Company is still running well, but then I went on to start other new things. So then, then I had five years at Moniece, which is a FinTech startup. It’s like HQ’s in London, but it’s actually has Estonian roots.
That’s how I got invited in and then there I was in a leadership role. Then we were really going from, we had 20 something employees when I started, then at the peak, it was 420, so it was more like a scale up experience and scale up track there. Then after that, I’ve been doing a bit of software business with a software development company, and from there, I was basically recruited to come to my first ever public office or public position. I’ve never tried my hand at anything related to the government before, so in that sense, I suppose I’m new to the government side of things, but that’s also what this program has been doing in the past, that mostly our staff is actually very entrepreneurial, and mostly also with startup backgrounds.
Mark: How different does it feel from the startups and software and technology companies that you worked for before?
Lauri: Oh, it’s quite different in many ways, but then in some other ways also, I would basically say, if you have worked for a really large multinational corporation, then working inside the government is not that different. So the level of procedures and procurement rules and whatnot, is probably quite similar. That’s maybe not so huge different from business world, but what is different, I suppose is the tempo of things happening, right? Because in a startup, normally, when you do product development you have, if not fully controlled, and at least you have a pretty good control over your product and you can decide things quickly, be agile, fail fast, all these principles and concepts, but with a government run program, of course there are different parts of government that do different processes.
Their processes are, let’s say they don’t change so quickly and they’re not so open to experiment on things. Well, especially when it comes to things like ID documents, so you perhaps also don’t want your government to be experimenting things with ID
documents. We want this to be solid, right? But then with this kind of being solid, also comes more waterfall type of thinking and just the tempo is different. It takes some getting used to and getting adjusted to.
Mark: Yeah, I guess before we go into the details of the residency program, how did Estonia, they’re basically one of the first countries that really adopted and fully embraced the internet, how did that happen? What were the key factors that led to that, that kind of broad reorganization of government along those lines?
Lauri: Yeah, it’s something that’s there’s probably a number of factors, right. But it usually tends to be but go back, we literally just had our restoration of Independence Day, last week, so we’ve been again an independent country for the last 30 years, but when we regained independence 30 years ago, we literally didn’t have anything. So we had to build everything from scratch, and it’s a good thing and a bad thing at the same time. It’s a good thing, because, well, you get to build everything from scratch you have no legacy, right?
I think as a bit of a side effect also, it really brought up like a number of generations of people who were really good at building things. It’s like, “If you need something, okay let’s build it. If you need that thing, let’s build it, if you don’t have a process, okay let’s invent one.” So you have this almost entrepreneurial mindset, but through very many segments of your population, so very different parts of the country, government, business, everybody basically had to really start up a nation, right. Then once you get done with your basic building blocks, then you set your sights higher, and you want to do better and bigger things. So I think that played a role.
There’s also probably some historic, shall we say, accident, or historic incident that happened basically, was that back in the Soviet Union times, there was a decision to place the Institute of cybernetics in Tallinn. So in Soviet Union, it was like there was a lot of like center, like a center for one thing is placed in one place and the center for another thing is placed in another place. Then Institute of Cybernetics like that was decided to put in Estonia.
So when we hit the switch in the early 90s, basically, we did have quite a good quarter of IT and information – basically database specialists and whatnot back in the day. I think that’s contributed as well. Then there’s a third part, which is maybe a social thing, it’s like Estonians don’t like to communicate with people that much. We are maybe a bit better with computers. So literally, if you should go to a bus here, it’s like and there’s one person sitting in one corner or the bus, the next person going in, we go to the opposite corner. They’re not so sociable. I think, this connecting through internet works together with social setting in a way.
Mark: Sure. I mean, if we just look right of the Baltics, Lithuania and Latvia didn’t really have the internet until, if we think about the early 90s, when Estonia regained their independence, that was before – I mean, how many people were actually using email on a daily basis in the early 90s? Even in the US, like 20%, 30% of the population wasn’t very high. So to make those, I guess like rapid adjustments, I understand the benefit from I guess the re-founding or the re-independence, but it feels like there might be more there. Does that make sense?
Lauri: Yeah, I mean, well, very good question regarding Latvia and Lithuania, because obviously, they are also small countries, they also regained independence at similar time. They also had to rebuild everything. In that sense like we should be in a similar boat and to some extent, we are of course, as well. Estonia has pulled away in certain sectors and in certain ways. Little bit going back, like also it’s a question of what happened on the political level back in the day.
So we’d like to be Lithuania, it was a bit more like, how shall we say this? Let’s say you have your communist countries set up, and you have your communist politicians, and then you regain independence, and then you have free elections. It happened more in a way that the Estonian political leaders at the time were a lot younger and basically the old quarter of the Soviet style leaders was very quickly left behind. So that kind of like, the turnover at the top and the turnover of the political scene was pretty quick and pretty complete. Whereas Latvia, Lithuania, they took a bit of a milder route and a lot of these ex leaders still stayed in power, changed their policies of course, and all that, but still, some of the mentalities stayed there a lot longer. That’s what I, from also personal experience, like I also worked very closely with Latvia and Lithuania, had business in both of these countries, was struggling between the three quite extensively in the early 2000.
So there was like a, I would say the political change, because the people didn’t change as much was not so complete, it’s my personal experience with this. So I think we’re just younger generally, I think our Prime Minister at the time was the youngest Prime Minister in recorded history in Europe, and all that, and so they were ready to take more radical steps in many policies and of course, it was more risky and came with a lot of pain as well, but they were more willing to take more radical steps.
Mark: So basically, I guess in addition to the re-independence, you also had a replacement of the previous political elite, where in a lot of those Soviet Countries, it was the soviet officials who ended up being the political elite in the newly independent countries while you had a younger generation that quickly brushed aside the former soviet officials and that took control, because partially because of their demographic, that they were younger, they were more willing to embrace new technologies.
Lauri: True. Yes, yes, definitely that was a factor. I don’t know how easy or hard it is to quantify that, but I’m just basing this on my personal experience of those countries politics back in the day.
Mark: So how do we understand, I guess you’ve you mentioned previously, E-voting as well as E-signatures and E-identification cards. So how should we think about the – I guess, broader E platform of the Estonian government?
Lauri: Maybe go a little bit into the electronic or ID cards basically. I think, again there was a pivotal moment, because many European countries do have ID cards, some of them actually are quite similar. Like I think we copied ours pretty much from Finland, the technology stack back in the day, but there was one critical difference and there’s a question of, is it mandatory or not? Because in most European countries, even if they do have an ID card which has an electronic chip, and you can do digital signature with it, and it’s usually like an add on or something that you can opt in for.
Then the situation here was that there was a pretty brave decision at the time, but basically it was like, “Okay, let’s make this mandatory that everybody must have an ID card.” So a passport is optional, you can have a passport, if you want to, if you don’t travel that much, you might not take one out, but an ID card is a mandatory ID verification document. So it’s created this level of acceptance just by the force of law basically, back in the day. So it gave a very broad audience access to this critical piece of infrastructure, where you could verify and sign documents and access systems digitally, with a proof that was as good as in person or strongest in person so it upholds in every court, etc.
So that gave this platform a boost, and then the applications started popping up, so of course, in the beginning maybe not so many people were using digital signature, really then it became more of a norm, then more and more government services became accessible with this card up to the point nowadays where you actually in some government functions, you can’t even send in the paper documents. So for example, if you’re a contractor to the government, or government funded organization, you cannot send a paper invoice, it will not be accepted, it’s not possible or in quite a few years already.
So it has to be electronically submitted and has to be, so these things that – and I think the early decision to make sure that it’s a mandatory piece of equipment that everybody must have, just created a broad audience.
Mark: I guess, what are the mechanics of the E-Identification card? How do you get your identity verified? How is that information protected? Oftentimes, when I think about electronic stuff, that kind of question is, like the grandmother test, could my grandmother like use this, would she lose the password? How do you actually correct for some of those mistakes? What are the practical mechanics of the E-Identification?
Lauri: Yeah, I think one thing that is pretty well developed today, and it’s like a support service for this product, for this function is pretty good. You can literally call them up with like crazy technical problems and they answer pretty quickly. So it’s not like it’s hard to get support if you run into difficulties, but of course the grandmother test is definitely there, because it’s not only about the ID card, it’s also about physical infrastructure, you need to have a card reader, this card reader needs to connect to your computer. Of course nowadays, majority of people who use it actively use some electronic device rather than the actual ID card reader.
So you can create an electronic signature also with your mobile phone, that original devices based on your ID card, but then you can use it on the mobile, couple of different versions of this on the market, etc. but of course, yeah, in the in the beginning, it wasn’t so right in the beginning, it was just the card and you need to have a card reader and that’s it.
Then there is the whole pin codes infrastructure as you will have with your with your bank card. I don’t know, people got along. So I think, was it this year, tax returns I think like 90 something percent of that was done electronically. Everybody managed on the I-Voting, which well, of course not everybody here, everybody don’t have to do tax returns, right? If you don’t have anything to claim back or if you don’t have anything to pay extra then you just don’t need to file a tax report. Those who do I mean, like literally every grandmother and everybody is doing it online, and also the E-Voting I believe on the last elections, it was pretty close to 50%, if I’m not mistaken, who were participating using the electronic means.
We have another set of elections for local government coming in October. So this is expected, of course, partly to COVID, as well as expected that even a bigger proportion of the electorate would actually choose electronic means. Yeah, what can I say? It has been done, and the grandmother test has passed. What exactly was driving it? I mean, in the end of the day, I suppose it’s coming also to the same time when people get used to bank cards and pin codes. So in that sense, it’s another kind of a card, it has a PIN code. Okay, it has to pin codes. So in that sense, I suppose people also got more used to things like that. So it wasn’t a standalone experience, I suppose.
Mark: How, like the elections, thinking in the US, the US is still freaked out from the Russian interference in the last election. What that seems to mean is the Russians buying ads, and supporting different meme groups, not actual like election hacking to change results. The US has been resistant to putting a lot of even using machines to do voting in person, just because of the risk of hacking the risk of losing a paper trail that allows you to recount. So how have you been able to, you’re next door to Russia and – one of the kind of common rationales for your entire E-government program is to give a failsafe in case there is a physical invasion, that you can keep the government running online. So kind of you have this geographic proximity, this much greater immediate threat and yet, I haven’t researched it in depth but my impression is that your free elections E-voting is very secure. How does that work in practice?
Lauri: Yes. Well, you mentioned we are next door to Russia and have a long history with our neighbor. Back in 2007, I think Estonia was the first country ever to become under a cyber-attack from another nation state. This happened actually, it wasn’t targeted at election system, but it was a bit broader. It was during the time of some riots in Tallinn, and then they were clearly supported by these kind of cyber-attacks against different government systems. That was a pretty good test exercise as well. Then the overall, the thinking about the government infrastructure is such that it’s quite distributed.
So there are on purpose, there are multiple different systems and thereby just has to make sure that their system is capable of talking to other systems through a common protocol, but because the system is distributed, so there’s like less threat of one place to take a hit that the whole thing’s coming down as a House of Cards. That definitely was a good learning and training exercise and designed blueprint for going forward. But with the election system is like, so a couple of things, one thing is of course, like when you’re voting electronically then you can change your vote pretty much as many times as you want.
So for example, if somebody is putting pressure on you, or somebody persuading you into doing something, then you can always change your vote, and the last one counts. You can always go still under on the voting day, you can go to the paper palette, and that one will count. So it’s not like one directional. You can recast your vote just to make sure that nobody’s coercing you into something.
Mark: How have you dealt with privacy issues in the US privacy tends to be there’s relatively strong legal protections as well as, I guess, General cultural sense of the importance of privacy that prevents a lot of data collection that otherwise might be beneficial. What are the cultural norms around privacy in Estonia? Then, how do you navigate those cultural norms in terms of creating all of these programs?
Lauri: Definitely. We are part of European Union, so also GDPR. GDPR is here, but also already before GDPR. So data privacy, here well, we dealt with it is also transparency. For example, there is one population registry, and this population register holds my data, for example. Then if a government entity or person at any government official position if they want to query my data from the population register there is a log, auditable log that they done this. They received my data and for what and for what purpose, and I can log into the system, and I can see who has accessed my data and why.
In the early days, when these things were implemented, there were situations where people were found out basically snooping after your neighbor’s, relative or something like that. There were pretty public cases, and people were fired for this. Then it was very clear to everybody that actually the system works, that not only is there a trail if somebody accesses your data, but also you can see the trail and if it’s unjustified, then you can definitely raise an issue from this and say, what’s going on? Why are you – what was the justified legal right for you to access my data? If there isn’t one, then that’s a pretty serious consequence.
Mark: So basically, the way you dealt with it is by creating this, I don’t know, E-trail such that anytime the data is accessed, it becomes you can, yeah, call out that person and if it is done illegally or legitimately, open an investigation and have some legal sanction to their actions.
Mark: How has Estonia managed to attract tech talent? So in the US, the technology sector pays much more than most government positions, who are sometimes not viewed as that prestigious. If you can go work as a VP in Google, you’re probably making a million dollars a year versus like, I don’t know, in the US government you might be making, you’re making less than $200,000 in a giant bureaucratic mess, where you might not be as effective as you hope. So how has this Estonian managed to attract and retain tech talent to continue to operate and upgrade their systems?
Lauri: Overall, of course, this lack of tech talent is a global issue, right? It’s not limited to one country or one region. Let me just maybe talk about the business side of it first and then then offer some thoughts on the government position. On the business side, one thing we have one, I mean, of course, European Union, everybody can go and work wherever they want, so that’s one thing. If a person from another European Union country wants to pick up a position in Estonia, then they can freely do so. That does help with movement of people inside the European Union block, and Estonian –
Mark: Is that for private companies? Or does that include like public government? Does the Estonian government regularly hire non-Estonians?
Lauri: We do at least, but not of course in every position where you need, when you need to know the local language, right? Then it becomes a bit difficult for, but there are certain positions where that’s, not required and you can do that. But what I was about to mention was that, if you’re running a startup company here, for example and if you’re recognized as a startup entity, then you can import talent from also non-European Union countries. Otherwise, it’s quite a limited activity that the free movement of workforce from, from non EU countries is quite cumbersome, and lots of paperwork and quotas and things like that, unless you’re a startup.
So if you’re considered startup company, then you can bring in people to work for your tech positions as much as you can hire basically. That helps to alleviate the need a little bit. Then, of course, we have neighboring countries like Russia, also Belarus, Ukraine, not too far, which are really big pools of talent compared to the size of Estonia. We do have quite a sizable Russian speaking minority. It means, Estonian, Russian and English are quite freely used in daily life. I mean, you can find kindergartens, schools, whatnot in all of these three languages, so it also makes it easier for felon from other countries to relocate to Estonia. They can make their life work here, if they speak one of those three languages rather nicely.
On the government side, what can I say? I mean, there is such a thing as patriotism as well, at least, that was one of the reasons why I decided to join this program is that I felt that, “Okay here is something where I can contribute to my country using the skills and the business network and the background knowledge that I have.” I bet that is part of it as well, for the tech talent as well. Then quite a lot of the actual technical development work is of course, done by third party contractors through tenders. It’s not necessarily that that old tech talent works directly for a government office. They generally tend to work for bigger, bigger system integrators or software companies.
Mark: A lot of the technology development is done via procurement, because in the US, I tend to think that you American procurement rules are like pretty broken.
Lauri: I have a story on that.
Mark: What’s the story? Have you ever experienced American procurement rules in Estonia and how do they differ and how our Estonia has managed to get their procurement rules effective?
Lauri: The story I heard, and I don’t know if it’s true story, or if it’s a make-up, but anyway, so the story I heard was about the US Army procurement. The US Army was procuring biscuits for the soldiers with armed forces. Inside the procurement dossier, they had like an 80 page description of how the biscuits should be made. There was one thing missing. They didn’t mention anywhere that the biscuits should taste good. I think that was the description of our government procurement systems, right. So that sometimes they lose the focus, the focus goes the wrong way.
I suppose the Estonian procurement laws are probably not that different, at least on the European level, they are quite harmonized, what is the level of in-country procurement volume and what’s the level of international volume if you go above certain hundreds of thousands of Euros then it has to be an international tender throughout the EU, etc. So these laws are quite harmonized on a base level between EU countries. Of course, there are local nuances and whatnot. I don’t know.
I suppose it’s a bit of an art as well, like how to run the tenders in such a way that you actually get high quality results from the other end. It takes a smart buyer as well to know the system, to know the rules, and how to avoid the lowest bidder phenomena when you end up with also the lowest quality, but definitely it’s a challenge, I think for every government, because the public has a right to know how their money is spent and they want to be sure that there is no corruption. That brings along such a system. I’m not sure if private companies would use the exact same methods and probably not always do.
There is a thing, you have to think about, if that’s the best way of doing it, but I think you can manage still within that system. I have to admit, of course I’m not so familiar with American procurement laws, how are they different from the European ones, if at all.
Mark: Yeah, I don’t know, if the content is that different. There’s two useful examples that I sometimes think about, one is the US Army, I think they designed and started producing a mask for COVID and that mask was announced in like February of this year. So basically took them a year to design and like I don’t know, several million dollars to design a cloth mask to put on your mouth. It wasn’t a medical grade mask, it was just a basic cloth mask and to me, this is, they issued a press release, they were very proud of it.
That to me is kind of silly. It’s like look, just go on Amazon and buy like a million masks and give one or two to each of your troops, there’s an easy solution. You don’t need to go through this whole process. I’m not sure if it’s procurement, per se. It is this kind of broad question of like, if you are a government agency, how do you accomplish this kind of task? To what extent are you constrained? Perhaps they were legally required to create their own. Perhaps they just had a pot of money sitting around so they figured, “All right, let’s spend it on this.” It’s difficult to know.
The other example is Operation Warp Speed, which I think is largely responsible for the extremely quick rollout of vaccines. What they did was they placed guaranteed-by orders among like the top 10, I forget the exact number, but the top 10 vaccine companies, not all the vaccine companies were going to work, but all you need is a few of them to work and that becomes a very worthwhile investment. These companies could feel comfortable investing in the development and testing process for the vaccines, knowing that even if the vaccines were a failure, they would still have their buy orders guaranteed to cover their costs.
Operation Warp Speed was done effectively by short circuiting all of the typical procurement rules, and then thinking why this is a global vaccine or it’s a global public health emergency, therefore, we’re not going to take the typical time. If you think for every extra day that the American economy is shut down, the American economy is what? Like a $20 trillion economy. Each day is, I don’t know, $80 billion, or something.
So if you assume you’re losing half of the economic activity every day the economy is shut out, you’re losing about $40 billion a day. Okay, you’re losing $40 billion a day, therefore, it’s easily worthwhile to waste an extra $40 billion, if you can just accelerate the vaccine pipeline by a day. That was done by operating outside the typical system. Obviously, that was an emergency that does demonstrate, I think the constraints of some, I don’t know, traditional procurement processes.
Lauri: Exactly. I mean, I heard an interesting story the other day, from the time of the first wave of COVID, about one of the hospital departments, basically one of the units at the hospital, they needed to send their staff to work from home, because they were officials, they could they could work from home, but they didn’t have laptop computers. Then, of course, there was no chance of doing any kind of procurement or all the reserves they had, they were already used up. So there wasn’t any availability or getting quickly some IT supply from their existing systems. I was just listening to the story. I’m just thinking, Euro hospital? This is a very serious life threatening crisis, you need to keep operational, so one thing you can’t shut down during this time is the hospital.
Whatever is it, logistical unit or any other unit and it needs to operate, and if what standing between you and operation is having a laptop computer, then why don’t we just take a credit card, go to the nearest electronics shop and buy a few, and get done with it. That is not how the thinking goes, unfortunately. Well, by money it’s pretty quickly the end of the day, but for me, it would have been like, why don’t you just go and buy a few laptops for your staff for that unit and just keep operational? It’s a bigger problem not being operational than dealing with the procurement regulation afterwards. Go figure.
Maybe we will learn from this in that sense as well, as you can begin to recognize that sometimes it’s more important to act quickly and get the thing done, and deal with the paperwork later, but of course, it’s for people who have worked long time in these kinds of systems and positions, it doesn’t come as a first option to their head. So in that sense, I think if countries and governments are able to rotate people more between the private sector and the government sectors, that would be a very beneficial thing, because after 10 or 20 years in similar system, your thinking also becomes encapsulated by what are the boundaries of the system. If you’ve seen different ways of working, then we’ll be more flexible when you need to be flexible.
Mark: Yeah. How has the s-Governance program stayed, I guess, flexible and growing? If we think about very successful tech companies in the US, after about 20 years, they typically become bureaucratic and sclerotic. Google, for example, most of my friends in the technology industry make fun of Google. You go into work, you work two or three hours get a bunch of free food, play in the jungle gym, and you go home. There is a perception that the Google culture is not very productive anymore. I suspect Facebook will start seeing this in the next five years or so.
Microsoft went through this period, but then has successfully reinvented themselves, so typically, I think, by the time you get 20 years, particularly if you’re a very big system, when the principal agent problems become quite challenging, then you often deal with kind of like, are you sure everything is working as effectively as possible? Has this set in in the Estonian e-Governance Program? Or if so, what does that look like? If not, has there been any intentional effort to make sure that this bureaucratic sclerosis does not set in?
Lauri: Well it is definitely a factor right and I would be lying, if I said that we don’t have our sets of issues where things looks exactly like you mentioned, that some systems are getting quite old, and then maybe not maintained and kept up to date and then you might not notice that because maybe it’s some subsystem of a subsystem, which not a lot of people see, but then something changes like COVID for example and suddenly, a million people will visit some sites that is usually getting maybe a few thousand visitors, and then it all comes crashing down.
We have these examples, definitely it’s a risk. It’s one thing is age, but it’s also the size of the organization that matters for this first stage and problems that you mentioned. The bigger the organization gets, the more political it gets, right? So if you go beyond 150, or a couple of 100, or a couple 1000 people, then the more and more of your day will be spent on office politics, or if it’s not in the actual physical office, then it’s still internal things to just keeping the lights on starts to take more and more effort, because you need to keep in mind all these different relations and hierarchies and how things connect to each other and less productive time is actually spent on things that matters and user or the end customer.
I think one thing that helps with Estonia for that matter is of course, the size of the country, and also the size of these organizations that they tend not to be multi 1000 person organizations, they are a bit smaller. So I think that helps, but of course, the risk is there. Especially with the kind of things are the same and nothing changes for a while and people do become complacent and these problems are there.
Regarding the e-Governance though, I would have to say that still, new things are coming each year. Here also, the COVID pandemic was for example, one accelerator of course, I suppose it was in other countries as well, but one thing that we launched last year, and it was really properly accelerated through the COVID situation was a service called E-Notary. There are services or situations where you have to go to the Notary to get a certain deed validated like purchase or some property, some real estate deals or buying and selling of unlisted shares and a few other things as well.
The E-Notary service was there and it has been planned for a while, but it was very limited to only a few number, like a very short, short list of transactions. Then when COVID hit, then we were able to, I think it was like within four months, actually extend the E-Notary services to like pretty much almost everything that somebody needs to do without having to go to a notary physically using their ID card. So there are still examples every year where new things are popping up and are being actually developed in a more agile way than not so like a very long winding waterfall type of a process, but the threat is definitely there, that the older the systems get, more used to people get to them, then there is not enough innovation happening anymore. So it is a discussion ongoing and how to keep it front and center.
Mark: Cool. Why should I sign up for an e-Residency program?
Lauri: That’s a good question. Why should you? Depends on your circumstance, right? Broadly speaking, there’s two buckets of use cases, I suppose, like one situation is people who have some connection to Estonia anyways, but they are not Estonians, they’re not citizens, but they have some connection. Maybe they work for an Estonian company or they own shares in Estonian startup or board member of a student company or they own real estate here or any kind of connection that you have to this country. It’s just an ease of doing business and then getting things done, if you are any resident, because you can use exactly the same infrastructure and exactly the same services as the people who are residents with you. It’s like one bucket of things. Let’s say you have some connection to the country, through employment, investment, or the type of activity that requires you sometimes to sign some documents or deal with property or shares and things like that, I don’t know, shareholder meeting minutes, whatnot.
There’s another side where basically, people would come and use e-Residency specifically to use the Estonian business environment, to use their Estonian legal environment to run a business to start the company, but do that remotely. There’s twofold, one thing is we do have a rather appealing tax system as well, where corporate income tax, you don’t have to pay corporate income tax on withhold earnings. Basically, let’s say if you have a small business, you’re starting you’re investing in it. If it turns profit, this profit is not taxed unless you take it out. So for a starting business, that’s quite an appealing scenario, because you can keep the money turning and compounding in the business until one day is okay, “Now we need to pay some dividends,” and then those dividends are taxed, with a flat rate of 20%, which is in itself is not super generous. There are countries which have lower tax rates and countries which have higher ones. This is rather like, let’s say middle of the road, but what makes it appealing is that if you don’t take the money out, if you keep investing in the business, then you don’t have to pay corporate income tax on this. This is a tax incentive, I suppose.
The other part is, of course, the lower level of bureaucratic hurdles that you have. I was looking at a paying taxes survey or paying taxes index, where they look at how long does it take for an SME-sized company of, I think it was 50 persons, like how many hours a year does it take for such a company to file taxes to deal with that?
Let’s say in a country like France, this is 320 hours and in a country like Estonia, this is 50. There’s quite a big difference, because there is like well, of course, things are done electronically, but also there is less bureaucracy here than in many other jurisdictions. It’s of course, the tax regime is quite favorable, but it’s also the fact that you can do business with lower costs, because the admin overhead is just less due to less bureaucracy, and also due to the fact that you can get everything and anything done regardless of where you are. So you don’t need to wait for some government office to be open, because you can file all the documents you need electronically online at any time you please and things like that.
This is this is quite appealing to businesses, or entrepreneurs who have any cross border virtual type of business, where maybe you’re not dealing so much with one physical location, I don’t know you’re, you’re a consultant, you’re selling your services, you’re selling your software, it doesn’t matter physically where you are, it’s not the place that is important, it’s like what you do that’s important. For those kinds of businesses, of course, they have a wider choice of legal environments where they could decide to incorporate, they could look at Estonia, they could look at the country and weigh the pros and cons and costs and benefits and then make up their mind.
Recently, what’s been like last three years, the rate of new businesses generated in Estonia, about 20% of them have been actually e-Resident companies. It’s not an insignificant part of the Estonian business environment that is now being generated and turned around by e-resident companies who start things from abroad.
Mark: Do you know what the total market cap of the e-Residency companies are?
Lauri: No, that’s I do not know. We are looking at of course, like how things go. How many of them become active and then how many of them start paying taxes at some point in some shape or form. This takes time, right? When a company starts, as you know, the failure rate of early stage companies is very high. Lots of people start lots of companies, and less than 20% of them see their fifth birthday, right? But those who do, then I mean, of course then they’re more stable and that’s where the tax benefit and economic benefit from the country comes from. It’s a rather long game in some ways, but it’s also a platform game, where we can say, “Okay, so if 1000 companies start, but some really good ones from them become super successful, then the platform really pays off.”
Mark: Are these companies, are they mostly selling to Estonians? Or are they selling to the EU and they figured Estonia is the easiest place to start a business in the EU, so let’s just start in Estonia?
Lauri: Yeah, most of them would not be selling to the Estonian market, the Estonia market is small and in itself is not so it’s not so appealing. Yeah, it’s more about selling to other markets, perhaps. Well, sometimes it’s EU directed, right? If you’re non-EU entity or non-EU entrepreneur and you want to do some business in some EU country, then you’re looking at which one is the best to incorporate in, but it’s also inside the EU actually as well. I think our top six countries for business owners it’s actually like 50-50 between European Union countries like Spain and Germany and Italy and France as well. Also non-EU countries, it actually has an appeal for inside the EU as well as outside.
Mark: What does success look like in five years?
Lauri: That’s a good question, right? Well, if you look at from the owners perspective, so I’m trying to think of a few different angles, how to how to look at it. If you look at the owners perspective for the e-Residency program, basically funded by the government, so what’s a good outcome for the government is, of course, if the tax returns generated by this program are bigger than the cost into this program, so it has a positive, positive ROI and it does. I mean, success isn’t purely based on like, how big is the tax income generated by these companies that were created because of e-Residency?
There’s also another view, maybe a softer view is like we’re looking at what today we’re looking at 84,000 e-Residents. If the e-Residents would be a city, it will be the third biggest city in Estonia. In a way, you can also think of e-Residents as part of being an Estonian diaspora, like a digital diaspora almost. Of course, the value of having a big diaspora that you have a piece of their mind, you have a piece of their heart, like what is exactly that value? Sometimes maybe not so quantifiable in economic terms, like what’s the value of having 200,000 people strong diaspora versus having 1 million strong diaspora, but these are the soft value sides where I believe that this is one way for a small country to have more friends in the world. In times like these, you need friends.
Mark: Is most of the benefit from the program anticipated to be future tax revenue? Do people have to pay to get e-Residency? Does that cover the administrative costs?
Lauri: It does. Yeah, exactly. Right. Basically, to apply for the e-Residency costs about 100 to 120 euros, depends on the jurisdiction a little bit and the logistical costs and overheads. The other, the purpose of this fee is basically just to cover the cost of going through the basic KYC, checks that the police and border guards are doing, reviewing the application, printing the document, shipping, handing it out, all these things. This is just to breakeven. It’s not the purpose, or the revenue side of the program is not the applications. They’re just a breakeven, the breakeven product, basically. The longer-term benefit is increased economic activity in Estonia, outside of Estonia, and then, of course, and then result one day, direct tax benefits to the country from those businesses that survived and thrived.
Mark: Have you been integrating blockchain technology at all into either the e-Residency program or the e-Governance Program? Are there plans to do so?
Lauri: Actually, the public key infrastructure that we use is pretty much a blockchain-based technology. It’s been in use since what? Is it 2000, 2008, something like that. It’s quite a –
Mark: That’s the time is, what? Bitcoin, I think, they –
Lauri: I think there was a six months difference between the white paper and when Estonia put the first blockchain-based system in production. Yeah, they were very close to each other, actually. Yes. It’s been a long while now. There’s, of course, some industry in terms of our companies that are spreading this technology and helping other countries and other companies to implement this technology that have sprung from here. Of course, it helps if your whole country’s actively using it, so it’s easier to expand into other markets.
Mark: Cool. I think I’m out of questions, what questions did I not ask you that you would like to answer?
Lauri: Okay. It’s an interesting one. Yeah, I suppose how the e-Residency and these ideas, how do they relate to what Chartered Cities program is about? Maybe it would be one question, in your view. Then, perhaps, also, I would have asked myself, how are other countries doing? Is anyone following their footsteps with similar programs?
Mark: Yeah. What are other countries doing? How are they doing, copying you? Are they doing anything better than you guys?
Lauri: Yes. I think over the years, a number of countries have been giving signs that they are thinking about these kinds of programs, and they want to bring something forward. It has taken a bit of time, which is perhaps not surprising, given the topics that we discussed earlier.
Now, Lithuania has launched an e-Residency program in June. Also, Ukraine has passed laws and legal works to create their own program. Also, Portugal has been talking about it, and then they have plans for it for a while already. At least, you have, let’s say, Europe and immediate neighbors, there’s three or four. There’s two things, of course, it helps in one way of looking at this that if there are people following and to some extent, maybe copying the ideas, but it also helps to validate that your idea was not crazy, and that other people are doing the same path.
Also, of course, the same complacency issue that we talked about earlier. If there is competition, then people tend to sharpen up their game. In that sense, I’m looking forward to other countries doing it, because we definitely will be able to get some new ideas, or get the pressure angle on some topics from these countries as well, then see how they run this program.
Mark: Well, and I believe that Prospera hired a lot of the e-Residency team, Prospera the charter city, charter town development in Roatan, Honduras, a lot of the e-Residency team. What can we, I guess, expect from that? I don’t know how much you know about Prospera, but if you could hypothesize on what it would be like for a charter city to adopt e-Governance technology?
Lauri: I think for a charter city, I suppose it’s probably the only way. What other options are there practically?
Mark: Yes. Real residency programs.
Lauri: Yeah. I do know about Prospera. I’m, of course, hoping they will succeed in implementing what they’re out there to do. I’m not so sure if the main issue there is technological, though. It might be more of a, let’s say, if we think of the classical product, or distribution type of problem for a startup, then I’m thinking that maybe the issue, or the bigger obstacle for these kinds of setups would be distribution and getting enough people excited and then seeing this as a legitimate and viable option.
I think, maybe the technology part might be actually the easier problem to solve. Then again, I’m not so deeply into that to be sure. At least, that’s my current understanding and opinion. A little bit, maybe also related to the success of digitalization in Estonia as well, is the technology is easy to copyright. It’s the institutions that are difficult. That’s something of course, that the Chartered Cities are trying to address, recreating the institutions. I think it’s the right path.
Just maybe to bring an example and say, if we think of let’s say, many of our systems are based on having one population registry, which other agencies then query as needed and that will be for the data they do need. Then, if you go to a country like Germany, which is a federal state, then suddenly, you have probably, I don’t know, 20, or 30, population registries, and then maybe also 30 or 40, different tax authorities, etc. It just gets very complicated to agree on anything, because the institutions are so distributed, and so buried in that sense, that something may be charted cities, of course, trying to address and recreate also the institutions part of it.
Mark: Yeah. I think that’s right. I think the, I guess, challenge is as to what an e-Residency program would look like in a charter city, at least my understanding of how you explained the value of the Estonian e-Residency program, is access to a very easy to do environment to do business in, and that is embedded within the broader ecosystem.
Yes, here’s one question. If Estonia was not an EU member, how would that affect the number of people doing the e-Residency program?
Lauri: Here’s a good question. We’ve been a member for quite a while. Perhaps not so easy to think of it from this perspective. Yeah, definitely it would have some impact, because, especially for the non-EU founders and entrepreneurs, having a beachhead type of operation inside the European Union is what they want. Then, of course, that wouldn’t be there. Since we do have quite a number of EU founders and the EU e-Residents as well, it would definitely be seriously impacted, I would imagine, but it would not be zero, I think.
Mark: Even the EU founders, though, presumably they’re locating in Estonia, because it’s easier to start a registered business in Estonia than France. They’re looking for that regulatory arbitrage to an extent. If Estonia was not part of the EU, then they would either register in France. or maybe they say, I don’t know, like Germany is easier, or Spain is easier? I don’t know. There, if Estonia was not an EU member, then that might impact their decision to register, just because Estonia, the market is so small, that those people aren’t trying to launch potentially to be a part of –
Lauri: True. No, no. Definitely. Definitely being part of the EU block is a strong point of the value prop. I think, especially if you also add here financial services and banking as well, then having the set up inside the EU versus other country, I mean, definitely also has an impact on the business outlook, and the trust that your customers would place on that business. It’s probably quite a big part of the value proposition as well.
Mark: That means that a Charter City that’s thinking about an e-Residency program needs a – either the value prop needs to be, “Here is a larger market, here is something that you can do in this country.” It’s not just the business environment. The business environment helps, but nobody cares about Antarctica having a good business environment, because it’s really cold there and nobody wants to live there. You need an easy business environment, but you also then need some type of, I don’t know, comparative advantage, whether it’s access to the larger market in the EU, whether it’s the allowance of some new type of technology that otherwise might be very heavily regulated. You need the combination of things to really solidify the value of an e-Residency program.
Lauri: Yeah, I think you’re exactly right, that you need a combination of factors that would make the proposal attractive. If it’s just one thing without the other, then just like a chair with one leg doesn’t stand up. Need at least three.
Mark: Well, I think that’s all my questions. Thanks so much for coming on the podcast.
Lauri: Thanks, Mark. It’s been a pleasure talking to you today.
Mark: Thank you for listening to the Charter Cities Podcast. For more information about this episode and our guest, to subscribe to the show, or to connect with the Charter Cities Institute, please visit chartercitiesinstitute.org. Follow us on social media, @cci.city on Twitter and Charter Cities Institute on Facebook. I’m your host, Mark Lutter and thank you for listening to the Charter Cities Podcast.