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The proposed site of Alphabet's Sidewalk Labs 'smart city' is seen after the company announced it has pulled out of its project due to economic uncertainty in Toronto, on May 7, 2020.CHRIS HELGREN/Reuters

Google affiliate Sidewalk Labs is abandoning its smart-city development project in Toronto after two and a half years of controversy over its origins, overreach, and privacy and financial implications.

Sidewalk won the right to plan a community called Quayside on the downtown Toronto lake shore in 2017, hoping to build a 12-acre neighbourhood “from the internet up.” In partnership with Waterfront Toronto, Sidewalk imagined a place filled with new technologies such as heated sidewalks, robotic garbage systems, and, crucially, sensors that would collect data about how people move about cities and inspire even more innovations.

But the project faced frequent delays and criticism. Ontario’s Progressive Conservative Premier, Doug Ford, questioned its value to taxpayers, while progressive activists raised concerns about governance and surveillance implications. Tech-billionaire Jim Balsillie said Sidewalk would divert new intellectual property and the wealth it would create to Alphabet.

Sidewalk announced the cancellation on Thursday morning.

The New York urban-planning company blamed the COVID-19 pandemic, saying its devastation of the global economy and its effects on the Toronto real estate market had hurt the project.

"It has become too difficult to make the 12-acre project financially viable without sacrificing core parts of the plan we had developed together with Waterfront Toronto to build a truly inclusive, sustainable community,” chief executive Dan Doctoroff said in a statement. Sidewalk did not make him available for an interview.

Sidewalk and Waterfront Toronto, an agency created by the municipal, provincial and federal governments to oversee redevelopment along the lake shore, were negotiating the final details of a deal in preparation for a vote by the Waterfront board on June 25.

A source close to the negotiations said Waterfront had in recent weeks arrived at project details it was satisfied with, including financial considerations, then sent them to Sidewalk and Alphabet. Waterfront wanted confirmation that the parent company would financially backstop the project, particularly if things went awry. The Globe and Mail is not identifying the source because they were not authorized to discuss the talks.

Mr. Doctoroff had said before the pandemic that he was unsure if the project would make financial sense on a 12-acre site, after paring back a controversial plan last year that would have expanded it to 190 acres. Larry Page, the Google co-founder who championed Sidewalk, stepped down as CEO of Alphabet in December, reducing his influence. A Sidewalk spokesperson said the urban-planning company informed Alphabet of its decision on Tuesday.

Waterfront Toronto chair Stephen Diamond said in an interview he learned of the cancellation on Wednesday evening. He said he was disappointed, but not surprised, because of reports that Alphabet’s interest in real estate has waned amid the pandemic. Waterfront is the majority owner of the Quayside site, at the foot of Parliament Street in downtown Toronto, and can now consider new options.

Mr. Diamond said the pandemic has caused him to rethink the economic opportunities of the site, although its future was not his to decide. Among other possibilities, he said he is open to the idea of more public housing than Sidewalk had pitched – not just rental units, but for ownership.

“Every crisis brings opportunity, and we have to look at these things now,” the Waterfront chair said. He declined to comment on recent negotiations, except to say that parent company Alphabet was involved.

Sidewalk said on Thursday that it would maintain a presence in Toronto and reassign staff to other projects. For the moment, it will return to the business model of its early days, incubating other technology companies connected with urban living.

Last year, it announced it had formed an infrastructure investment company with Ontario Teachers’ Pension Plan called Sidewalk Infrastructure Partners – but Sidewalk Labs has insisted it is a separate entity, even though Mr. Doctoroff is listed as a director. Its business model is aligned with Mr. Doctoroff’s experience as deputy mayor of New York in charge of economic development, including real estate and infrastructure projects.

Quayside was a regular source of controversy. Sidewalk caught the city by surprise in 2019, when it asked in its draft master plan to control a swath of extraordinarily valuable Lake Ontario real estate, 16 times the size of the plot it was awarded.

The company had long said it wanted more land, but the amount in the draft stretched far beyond Waterfront Toronto’s purview. Last Halloween, Sidewalk agreed to return to a 12-acre plan.

Many of the project’s supporters had either resigned or, such as Waterfront Toronto CEO Will Fleissig, who had set it in motion, been pushed out.

Mr. Ford’s government later fired three directors – including chair Helen Burstyn and Mr. Fleissig’s successor, acting-CEO Michael Nobrega – in December, 2018. That was just one day after Ontario Auditor-General Bonnie Lysyk published a report that found Sidewalk was among bidders for the project that received more information than others.

On Thursday, Mr. Ford said the Quayside site can now become “spectacular.” His frequent sparring partner, Mayor John Tory, acknowledged the project’s many controversies, but said he was "extremely confident there are partners eager to undertake” redeveloping it.

Prime Minister Justin Trudeau attended the original announcement, commending its ambition, but his office sent a request for comment to Infrastructure Minister Catherine McKenna. “Quayside continues to provide opportunities for innovative solutions to urban challenges, including affordable housing, active transport and climate resilience,” she said in a statement.

While cities worldwide are looking for ways to embed new technologies into their infrastructure, Quayside would have been globally unique because of its top-down nature – a whole community put together by one of Silicon Valley’s richest companies.

Sidewalk had said it would ensure that peoples’ privacy was protected in the community. But opponents flagged concerns it could set a bad precedent for surveillance in cities, and warned that even anonymized data are vulnerable. And an early planning document from 2016 unearthed by The Globe and Mail revealed Sidewalk’s founding vision for a community included having the power to track and predict people’s movements.

Mr. Balsillie said in an interview that Sidewalk’s withdrawal was a “beautiful vindication” for opponents who called out governments for partnering with a company whose parent is known for hoarding intellectual property and collecting user data. “It had to be this way for the lesson to sink in,” he said.

With a report from Jeff Gray

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