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Ontario’s auditor-general has found that Waterfront Toronto gave Google affiliate Sidewalk Labs preferential treatment in its selection for a partner to build a proposed smart-city community on the city’s eastern lakefront, rushing numerous parts of the process with insufficient government oversight.

Infrastructure Minister Monte McNaughton, who oversees the file for the province, promised to take “decisive action” in a matter of days about the the findings in Bonnie Lysyk’s annual audit, which recommended the province develop responsible policies to govern the new kind of tech-driven community Sidewalk wants to build on the waterfront. Asked by The Globe and Mail what actions his ministry would take, he declined to speculate except for principles that would guide them: “We’re going to ensure that taxpayers get value for money. We will ensure that proper oversight is brought forward. And that privacy laws are followed to the letter.”

The proposed 12-acre community, called Quayside, has come at a time when U.S. technology companies have joined the ranks of the world’s most valuable firms. They have also come under increasing scrutiny for their use of consumer data, both in terms of privacy and the potential wealth that could be generated from developing future technology from that data. Sidewalk is a subsidiary of Google parent Alphabet Inc., one of the world’s foremost data-driven companies.

Quayside would be filled with sensors – for example, to count pedestrians or test for air quality – to collect information to help build future urban technologies. Waterfront Toronto, an agency controlled by all three levels of government, announced it had selected Sidewalk Labs as its “innovation and funding partner” for the Quayside neighbourhood in October, 2017. The project has faced criticism from Canadian technology leaders over how it would handle the wide range of data issues that would come with building a neighbourhood with digital technology at its core.

Ms. Lysyk’s report echoed many of these criticisms and offered more. It made public for the first time concerns among her office, government officials and Waterfront Toronto directors that insufficient timelines were provided to sign off on the project, and how bidders were treated.

She recommended further government study and oversight of the project; at present, the three levels of government each nominate members to its board. She also suggested the province do its own public consultations and set up an advisory council to design future policies to govern the complex, data-driven world of smart cities.

The report appeased some of Quayside’s most vocal critics, including Jim Balsillie, the former Research in Motion (now BlackBerry) co-chief executive who chairs the Council of Canadian Innovators. “I welcome the scrutiny about their reckless smart-city charade,” he told The Globe. Julie Di Lorenzo, who left Waterfront Toronto’s board last summer over concerns about Quayside, said that she was “pleased that some transparency has been provided to the taxpayer and residents.”

In a phone interview, numerous Waterfront Toronto executives said that while they welcomed the report, they believed it misconstrued some details, including project timelines and the allegation of preferential treatment for Sidewalk. “We stand behind the process” that Waterfront Toronto has so far undertaken, said Michael Nobrega, the agency’s acting CEO.

The agency also provided a letter from former Ontario associate chief justice Coulter Osborne, who sometimes acts as a “fairness adviser” in procurement disputes, that said the process “proceeded on the basis that no proponent or potential proponent secured any unfair advantage.”

According to the report, in June, 2016 – more than a year before the announcement and months before the Quayside project went out for a formal request-for-proposals (RFP) – Waterfront Toronto’s chief planner wrote in an e-mail to Sidewalk chief executive officer Dan Doctoroff that “My new CEO [William Fleissig] and I are very interested in what you are doing at Google and would like to talk to you about a potential pilot in Toronto.”

This e-mail was part of a broader consultation process exploring the “potential for innovation” at the Quayside lands, but kicked off the chain of events that would eventually lead to Waterfront Toronto awarding the massive project to Sidewalk. Before the RFP was publicized, the agency provided information and site tours to Sidewalk – and while other potential bidders received similar treatment, Ms. Lysyk wrote in her report that “Sidewalk Labs received more information from Waterfront Toronto prior to the RFP than other parties. … This raises the risk of an unfair and unequal advantage to all parties that would be responding to the RFP.” Both Sidewalk and Waterfront Toronto pointed to Mr. Osborne’s letter to refute those statements.

Meanwhile, Waterfront Toronto’s then-CEO Mr. Fleissig, who resigned this past summer, noted a concern that would become a key theme for critics this year. In an internal e-mail from July, 2016, he wrote that Sidewalk, whom he referred to as sister company Google, “has purportedly told other candidate communities that they want to control ALL data in this demonstration project area. Could present privacy issues and control issues.”

Micah Lasher, Sidewalk’s policy head, refuted Mr. Fleissig’s comments. “That is not now, and never has been the case,” he said, arguing that the company had long floated the idea of housing data in a public trust, which it formally proposed in October.

Ms. Lysyk also wrote that the six weeks provided for companies such as Sidewalk to respond to the RFP in early 2017 was insufficient both in her eyes – given that other projects gave respondents 10 weeks or more – as well as in the eyes of unsuccessful bidders that her office interviewed. After Waterfront Toronto selected Sidewalk as its winner, a three-member committee of the board saw the draft terms of what would become the project’s initial agreement, and met with management to discuss it over the next month; that committee could not reach a consensus about whether it would support the project.

But Waterfront Toronto pressed on. Mr. Fleissig presented the initial agreement to the board on Friday, Oct. 13, after just two briefings. According to internal e-mails reviewed by the auditor-general’s office, “the Board felt it was being ‘urged – strongly’ by the federal and provincial governments" to approve the deal.

Still, the board signed the initial agreement the following Monday, Oct. 16 – with just one business day to review it – despite the fact that Waterfront Toronto “did not adequately consult” multiple federal and provincial ministries and city departments, the report says. And just a day later, Prime Minister Justin Trudeau, then-premier Kathleen Wynne and Toronto Mayor John Tory showed up to an event announcing the deal with Sidewalk Labs, with then-Alphabet executive chairman Eric Schmidt.

Mr. Tory has previously told The Globe and Mail that other parties involved in selecting Sidewalk had expressed “zeal” in getting the project through. In Ms. Lysyk’s report, an internal Waterfront Toronto e-mail was found to say that the Toronto mayor’s office had received “almost no information about the project” in the weeks prior to signing the agreement. Asked about this, Mr. Tory’s communications director did not provide a direct response, but offered a statement from the mayor that said he believed both Waterfront Toronto and Sidewalk would address Ms. Lysyk’s concerns.

Ms. Lysyk also echoed the concerns that many technology executives and data and privacy experts have expressed about insufficient information about citizens’ privacy and Sidewalk’s access to data that would be generated by the sensor-laden community – as well as the intellectual property that could be developed from it. She wrote further that even if any level of government is concerned about the project, the agreements and governance structure of Waterfront Toronto are such that “the governments’ ability to influence the decision-making process around [an agreement to go forward] would be indirect and may be limited.”

Waterfront Toronto bought the 12 acres of Quayside land between 2007 and 2009 for $68-million. Ms. Lysyk’s report cautioned that Sidewalk’s interest in expanding a smart-city development beyond the site – originally for as much as 800 acres of waterfront land, but later revealed to potentially include the entire 2,600-acre waterfront area – is outside of Waterfront Toronto’s authority and would require significant further approvals.

Waterfront Toronto and Sidewalk Labs are expected to complete a draft “master innovation and development agreement” in early 2019 to be revealed publicly a few months later. Once published, it will undergo public consultations, after which Waterfront Toronto’s board must vote on proceeding with the project by September, 2019. It will then be subject to further government approvals.

The federal infrastructure ministry is reviewing the Ontario audit, spokesperson Lama Khodr said, “to ensure that our federal investments in Waterfront Toronto continue to be effectively and responsibly managed while supporting the ongoing revitalization of Toronto’s waterfront.”