The smart cities opportunity

Alphabet’s Sidewalk Labs wants to use technological innovation to create a fully digitised smart city in Toronto, while innovating the financing structure for infrastructure assets.

Sidewalk Labs, an urban innovation company, is attempting to find answers to a question that cities are facing around the world: in a digital age, how can infrastructure be more efficient? The portfolio company of Google spin-off Alphabet has been given the chance to show how in Toronto.

After the city agency WaterFront Toronto ran C$35 million ($28.8 million; €22.38 million) over its budget in 2014 on a project to revitalise an industrial neighbourhood on its eastern shore, the development organisation issued a RFP for an “innovation and funding partner” to come up with ideas for how to do it better. Last October, WaterFront Toronto chose Sidewalk Labs to turn a 12-acre portion of Queens Quay into a thriving tech hub.

To do this, Sidewalk Labs is planning to build a fully digitised, clean and efficiently powered, autonomously driven, smart city.

The name ‘smart city’ may sound like a Jetsons-inspired, flying-car community of the future, but urban innovation expert Anthony Townsend, founder of consultancy Bits and Atoms, says it is really just the 21st century approach to age-old big city complexities.

“It’s basically solving the same problems cities have solved since the days of Ancient Rome, moving resources like water and power or securing streets,” he explains. But digitally connected infrastructure “can do it in ways that are far more effective and efficient”, Townsend says.

To understand what Sidewalk Labs wants to build in Toronto – the neighbourhood will be called “Quayside” – check out the testing ground they’ve set up as their headquarters in New York City’s brand new 10 Hudson Yards office tower. On the 26th floor, rows of brightly lit monitors flash live metrics of the building’s activity. Sensors of all kinds track energy usage, traffic patterns and even trash composition.

Founded in 2015 by Dan Doctoroff, previously chief executive of Bloomberg LP and a former deputy mayor of New York, Sidewalk Labs’ goal is to make data “helpful”, says Brian Barlow, the company’s director of infrastructure investments. “How can technology make cities more livable and how can it make it more affordable?”

To do that on a city-sized scale is going to require innovation at every angle. In Toronto, Barlow says Sidewalk Labs wants to create a smart city by connecting three sectors – housing, energy and transportation – to what he calls a “digital layer” or “city operating system”.

First comes the use of sustainable and easy-to-produce materials such as cross-laminated timber and prefabricated panels to build inexpensive housing units. Next, Sidewalk Labs wants to develop an energy network that uses micro-grids, battery storage and demand control to efficiently manage every building’s power usage. An example Barlow gives is being able to transfer power from a residential building at around 2pm, when it’s used the least, to an office building where people are busy at work. And third, Barlow says, is “the cool factor” of building a network of fully autonomous vehicles.

“We’re prepared to do most of it with the help of Alphabet’s balance sheet. But our blue ribbon would be that we have a very rich and broad collaboration with a variety of different partners.”
Brian Barlow, Sidewalk Labs

But financial innovation is just as important as technology in Sidewalk Labs’ Toronto project. The company has a strong imperative, Barlow explains, to partner with the public sector, including Canada Infrastructure Bank, and the private sector to figure out how to pay for an undertaking as large and unprecedented as this.

“We’re prepared to do most of it with the help of Alphabet’s balance sheet,” he says. “But our blue ribbon would be that we have a very rich and broad collaboration with a variety of different partners.”

The right kind of partner

According to Barlow, innovation in infrastructure development is “broken or ineffective”. He thinks new ideas and technologies are stifled out of bidding processes because other investors, who are “just trying to allocate money”, are undercutting prices by removing innovation. This is exposing asset managers to disruption risk, Barlow says, because as new technologies become cost-effective and easier to adopt, the infrastructure they’ve invested in may one day not even be viable.

But to attract partners, Sidewalk Labs is going to have to find the right kind of investors.

At its core, infrastructure is a play for long-term, stable cashflow. It’s a tough sell to ask fund managers to commit their LPs’ capital for a new kind of project that will have a higher risk than the average asset – or may not even fit their mandate.

Barlow says the kind of investors he has in mind are local and global partners, large institutions with direct investment programmes or asset managers interested in and willing to back new technologies. And for the latter, he doesn’t have to look too far.

Toronto-based InstarAGF Asset Management has been in discussions with Sidewalk Labs to better understand their vision and strategy, according to chief executive Gregory Smith. He says InstarAGF’s mandate as a mid-market, value-add investor focused on urban infrastructure puts them in line with what Sidewalk Labs wants to do in the firm’s own backyard.

“One of the reasons we set up InstarAGF is because the challenge in North America with increased density and demographic profiles is shifting the types of infrastructure we’re building,” Smith explains.

Their most recent investment was in February in a company called Creative Energy that’s developing district energy systems in Vancouver, similar to what could one day power the Quayside community.

Barlow is interested in matching with direct investors such as Ontario Teachers’ Pension Plan, which is also based in Toronto. And, though he didn’t mention it, another could be Macquarie Capital, which in February launched Macquarie Capital Venture Studios to work with companies engineering new technologies to make assets more efficient.

Rob Kipchak, Macquarie Capital’s head of Americas infrastructure, says: “There’s always the question as to what you would do if you […] started from the ground up and built something that could potentially be much more efficient. It’s always been an interesting thought project for us.”

“In my mind, if you want to succeed at smart infrastructure, that probably means doing one or two pieces at a time well.”
Andrew Townsend, Bits

One notion Barlow says Sidewalk Labs wants to dispel is the idea that they are  “going to do it all” themselves. “That is not the case,” he says.

InstarAGF’s Smith says it makes sense for there to be different parts of Sidewalk Labs’ overall procurement. “Having a holistic approach about how you can put the different pieces together is going to be the opportunity and the challenge,” he explains.

Townsend, the smart city consultant, adds: “In my mind, if you want to succeed at smart infrastructure, that probably means doing one or two pieces at a time well.”

‘Agreement to agree’

Sidewalk Labs is still years away from an official groundbreaking on Quayside in Toronto. Barlow says being selected in the RFP was simply an “agreement to agree on how to move forward”. For now, the focus is on perfecting a plan that can make their project a reality.

The spotlight it’s put on Toronto has already paid off, Smith says.

“If I think about the finance, venture capital and nature of the new innovative economy, Toronto actually has a huge role to play,” Smith says. “I think something like Sidewalk Labs will help Toronto become more recognised as a leader in the innovation economy on the global stage.”

On a personal note, Smith adds that, once the smart city project is completed, “I would definitely consider renting an apartment there.”