Innovations created as part of Sidewalk Labs’ proposed high-tech neighbourhood on Toronto’s waterfront could go on to be worth hundreds of millions of dollars.

Then again, Sidewalk could invest millions of its own money for an innovation that could later flop.

Who should share in these risks and rewards?

Last week, the urban innovation firm and sister company of Google unveiled its four-volume draft master plan for the $3.9-billion residential, commercial and office project on the eastern waterfront. In the document, Sidewalk says it should receive performance payments for its upfront investments in the project.

The firm also promises to share 10 per cent of the profits from successful technologies from the project with the public.

Sidewalk’s master plan, which will soon undergo public consultations, points out that performance payments and profit sharing are two approaches intended to protect the public interest while incentivizing the private sector, so both can “share in the value created by the project.”

But one expert says although performance payments have been a system shown to work in other projects, and mitigates the risk to the public sector for technologies, methods and other endeavours to be tested on Toronto’s waterfront, the 10 per cent profit-sharing proposal seems low when compared to similar models at innovation hubs such as universities.

Matti Siemiatycki, a University of Toronto associate professor of geography and planning and a former member of the Waterfront Toronto board of directors, says, when it comes to performance payments, the site will have big-budget features at a financial cost “above and beyond” what you would expect on a typical development.

“So the question is out of which pocket is the money for that going to come from?” he says.

One of those features could be the creation of advanced power and thermal grids, the latter able to recover heat from buildings and sewage among other clean energy sources, says Steven Turell, Sidewalk’s associate director of development.

Such systems would require “fairly risky” investments by the company at the beginning of the project, risks “we don’t think other developers would (take).”

Turell says Sidewalk hopes to recoup a good amount of its upfront investments through the economics of its project — returns from real estate investments for example — but “the bottom line is we aren’t directly compensated for the overall level of risk we are taking.”

That’s where the performance payments would come in, he explains.

“We’re looking for a mechanism at the end of the project where if those investments prove successful, and they deliver value to the public sector, we would earn a reasonable return,” he says.

Sidewalk’s estimates for the power grid projects for the proposed Quayside and Villiers West sites, for example, show the company could face a shortfall of about $45 million if utility rates for its customers were kept at market levels.

That’s an example where Sidewalk would be looking for a payment mechanism at the end of the project where, if an investment like this proves successful and delivers value to the public sector, Sidewalk would earn a reasonable return, the firm says.

“One of the things about our project, is we’re making a series of investments in the success of the (eastern waterfront) and in our ability to achieve the objectives that Waterfront Toronto has laid out for the waterfront,” Turell says.

The benchmarks for this success in Sidewalk’s project haven’t been established yet. They would be negotiated with Waterfront Toronto and the three levels of government as part of a final implementation agreement if the project gets the go ahead, Turell explains.

But those benchmarks would likely be measured in broad categories including Sidewalk’s ability to “accelerate development in the broader geography covered by its proposed IDEA District” — an area that includes Quayside, Villiers West and the Port Lands, where Sidewalk wants to deploy its innovations and act as a catalyst to bring “enormous economic value to the city,” Turell explains.

“The faster this (project) happens, the faster the city is bringing in development charges, property tax revenues, creating more jobs and particularly if this development has a robust commercial component, that will increase property taxes,” he added.

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Performance payments have been incorporated in the Eglinton Crosstown LRT and Infrastructure Ontario’s new Toronto courthouse.

Siemiatycki says Sidewalk’s call for performance payments is “potentially advantageous” for the public because it means the city is not taking on risk for technological innovations being developed by a private vendor the city has little control over and which might not work.

“The idea of pay for performance, we have done that in public-private partnerships now and the record is that pay for performance does work,” Siemiatycki argues.

Sidewalk is also pledging to give the public 10 per cent of profits over a 10-year period for what the firm calls “test bed-enabled” or “purposeful solutions” — technologies arising from the conditions created by Sidewalk Labs’ public partnerships on the eastern waterfront project. The share of the profits would kick in after the sale of the products to a second vendor and after initial deployment in Toronto, Sidewalk says.

Although Sidewalk says it was unable to find any kind of similar profit-sharing arrangement with government, Siemiatycki says hospitals and universities have rules around profit sharing pertaining to inventions, and Sidewalk’s 10 per cent proposal should be measured against those standards.

He pointed to U of T’s invention policy as an example.

“Because we are a university, we have people who are coming up with inventions. Some of them, depending on the field, could be very profitable,” he said.

“If an invention is done here at the University of Toronto, with university facilities and on university time, the (university has) a stake in it. In terms of the financial value, the formal formula is the inventor receives 60 per cent if the university commercializes it, and 75 per cent if the inventor commercializes it.

“So the university is saying they are going to take a stake of between 25 per cent of revenue and 40 per cent of revenue. Of net revenue. That’s a big difference from (Sidewalk’s) 10 per cent,” Siemiatycki says, adding Sidewalk is also capping their proposal at 10 years where as he believes the U of T agreement stands in perpetuity.

“Some of these innovations could be really significant. And if Sidewalk does come up with something that ends up travelling around the world and making tens or hundreds of millions, billions of dollars, the city and the public should be getting some of that benefit as a key contributor,” Siemiatycki adds.

That goes for data collected for example on individuals in Quayside, or the physical environment, he said.

“These are the conversations one has if we’re developing a true partnership.”

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