Corporate Meeting

Corporate Virtual Meeting: Infrastructure and the U.S. Economic Recovery

Friday, May 15, 2020
Brian Snyder/Reuters
Speakers

Adjunct Senior Fellow, Council on Foreign Relations

Diane Gutierrez-Scaccetti

Commissioner, New Jersey Department of Transportation

Mike Kerlin

Partner, McKinsey & Company

Presider
Ali Velshi

Host, Velshi; Business Correspondent, NBC

Corporate Program Virtual Meeting

In an attempt to create jobs and stimulate economic growth after the COVID-19 pandemic subsides, President Donald J. Trump and Congressional Democrats have discussed a multitrillion-dollar infrastructure plan. Speakers discuss whether an infrastructure plan could generate the necessary employment opportunities and what other measures the U.S. government could take to promote an effective economic recovery.

VELSHI: Welcome, everybody. Thanks for being with us. We’ve assembled a great panel of speakers who are really knowledgeable about a topic that I love talking about at all times but has become uniquely relevant now in this time of COVID-19, and that’s infrastructure. Hopefully, those of you who are with us today are interested in the topic as well.

But it’s one of those things that always puzzled me, because we live in the most prosperous country in the world in some remarkably prosperous times and the kind of thing you generally associate with infrastructure is countries that are sort of on the move, keeping up with the times, staying current, being competitive, and doing the things that are necessary. But for many of us who move around the United States and struggle with infrastructure, we wonder why this has not been something that we’ve done as well in the U.S. as we have when we travel to other countries. Well, it’s become newly relevant again because there are suggestions out there that we use this opportunity that coronavirus has brought us. It’s going to create greater unemployment. It’s going to have labor opportunities. It’s going to have a lower cost of money to engage in certain projects. There is a whole bunch of capital splashing around the world.

Is this the time to make improvements to our infrastructure in the United States? And, if so, how would you prioritize that? How would you fund it? How much of this has to do with the federal government, in which it’s very hard to get bipartisan legislation through? But it’s something everybody talks about.

So let’s have that discussion with the panelists who we have gathered today. We’re honored to have Diane Gutierrez-Scaccetti. She is the New Jersey Department of Transportation commissioner who has got some remarkably deep experience not just in New Jersey and in terms of transportation but in other projects and in other moments where we have had these moments of bipartisanship in determining how to have largescale infrastructure projects. So she could talk to us about, A, the relevance of it, where this goes, where the money goes.

We’ve got Heidi Crebo-Rediker, who is an adjunct senior fellow with the Council on Foreign Relations and, again, has great detailed experience on how these things come together, how they’re built, how you prioritize infrastructure projects, and what the return is on them.

And Mike Kerlin, who’s a partner at McKinsey, who talks a lot about the economics of it, why it makes sense, where it doesn’t make sense, what the various ways are of funding infrastructure projects, and how to think about them, because we have, in my opinion, gotten into this weird world in which we’ve become accustomed, along with our general distrust of government, to think of things that the government spends on our behalf as being wasteful, pork barrel, Christmas tree, good for politicians, bad for us.

So how do we rethink how we consider infrastructure? And I want to kick this off with you, Heidi, because you’ve got sort of a good big picture about whether or not there’s validity in thinking about infrastructure right now as a possible remedy for some of the bad things that coronavirus is doing to our economy.

CREBO-REDIKER: So, first of all, thank you very much.

I think right now the biggest imperative is that we are—we need to be spending big. We’ve hit the biggest economic shock that we’ve had in modern times. There’s going to be massive, massive damage to the U.S. economy. And we need to do the firefighting first, which is spending on health care and safety nets and big support for state and local governments.

And the reason I’m starting with that is because I think, you know, state and local governments are where 75 percent of the infrastructure finance, actually, comes from. They pay for it. They make the decisions. And I think there’s a—it’s important to frame it that 75 percent versus 25 (percent) federal. And the federal part of this has been very tricky over the years due to politics. Everyone agrees it’s a great idea, but we can never actually get there.

This is a big, bold opportunity for the federal government to actually step up. So in supporting state and local governments as part of the emergency firefighting package, it gives them the ability not to have to make big cuts to things like infrastructure in the months and years to come.

So, yes, this is an opportunity. I think it’s also an opportunity to rethink what—you know, for putting people back to work. We’re going to have massive unemployment challenges. We know already that an investment in infrastructure pays back in terms of job creation, but also in growth. And we’re going to be looking for different ways to grow our economy. We know that a dollar for an infrastructure—a smart infrastructure investment is going to pay out far more than a dollar on the other side. And there have been numerous studies that have shown sort of what the economics of this are.

And I think it’s also a good time to get people thinking about, you know, if we do have more federal participation, more than the 25 percent, because interest rates are so low, what is that going to look like? Start thinking about the pipeline. Get ready—you know, get ready so we don’t have this shovel-ready challenge on the—you know, as soon as we’re ready to move from the immediate firefighting to how do we actually deal with the unemployment challenge and the growth challenge on the other side.

VELSHI: Thank you, Heidi.

Diane, there are lots of aspects to infrastructure, right? And some of them are more obvious to us than others. Probably amongst the most obvious are water, which we don’t tend to think about as infrastructure; the gas that comes to our house; the electricity. But transportation, that one’s obvious to everybody.

This country has 5 percent of the world’s population and I think something like 20 percent of the world’s cars or motor vehicles on the road. We’ve got—we drive. We ship all our stuff all over the place. And you happen to be in New Jersey, which is one of those places that people ship to and through and from.

And I recall in the last round of federal infrastructure efforts, after the last recession, during the last recession, you were involved in that. New Jersey was one of those places where you constantly saw—I mean, the heartening thing to people who like infrastructure is you saw the signs up that said this is your American Reinvestment Act at work.

Talk to me about infrastructure and transportation and how you think we can benefit right now.

GUTIERREZ-SCACCETTI: Thanks, Ali.

Certainly infrastructure has always been, from decades back, a great opportunity for economic recovery after the Great Depression, the Great Recession, certainly now after COVID-19, even in the midst of it.

And I think what you said to start out is infrastructure is always important. There’s never a day when we shouldn’t be focused on the quality of our roads and bridges, and it shouldn’t be a crisis that causes us to turn in that direction.

So for me in New Jersey, in 2008-2009, when Governor—when President Obama was able to provide for us the Build America bonds, New Jersey benefited significantly by creating a $7 billion, ten-year capital program just for the New Jersey Turnpike Authority. That invested all $7 billion into infrastructure investment.

And the largest one, most visible, was the widening of the turnpike in the central part of New Jersey or central New Jersey. It was key not just to good traffic movement, reduction of congestion, but it was hugely important to creating jobs and kickstarting what was a very, very flat economy coming out of the Great Recession. It was a project that we thought would be about $2.6 billion. It came in at $2 billion, based on the conversation you had with, you know, very favorable interest rates. We were able to move the project quickly.

That investment, you know, in an infrastructure project is beneficial not just to contractors and unions that need to go back to work. It’s the full supply chain in New Jersey. It’s the suppliers of concrete and asphalt and pipe. It’s the lunch truck that comes to the construction sites. These are the kinds of kick starting activities that go all the way down the supply chain and, really, are what are foundational to getting the economy started.

They’re not discretionary, and I think that’s probably the key word. These kinds of projects today can do the same thing. And so I know our Regional Council of Governors has gone to the federal government and asked for relief, not just for the states but also for the DOTs, also for our transit system, because we need to bring these back up strong so that people can get where they need to go as they look to new careers and as they look to new opportunities, and some look to relocation.

These jobs also create the opportunity for great apprenticeship programs through our Departments of Labor where we’re able to retrain folks whose, perhaps, jobs will never come back, based on the impacts of COVID-19.

So, from my perspective, transportation is, obviously, a very foundational piece of government. It is the one area of government that I do believe the federal partners have a huge part in. We look to the federal government, you know, in the next few months to help us finalize our Portal North Bridge full funding agreement. That’s a $1.6 billion shovel-ready project that would really help the region in terms of starting, and they’ve been phenomenally helpful to us in getting that done.

Those kinds of baseline projects, those, you know, really, meat and potatoes of who we are are going to be the kinds of projects that help us really get back into a stronger economy and in a way that is necessary. It’s not wasteful spending. It’s just amplifying and accelerating required spending to make sure that we maintain a strong infrastructure.

VELSHI: Commissioner, thank you.

And, Mike, I think I’m going to pick up right there. The concept of necessary spending versus wasteful spending is one that dominates the discussion of infrastructure in the United States, which is very different than when I travel to developing countries in which people associate infrastructure with an improved quality of life and an increase in jobs, or when I travel to other countries where people view large infrastructure projects as a sense of national pride.

I, virtually, never find that in the United States other than in wonky gatherings like this, and I’m grateful for wonky gatherings like this, populated by the folks who are here.

But I don’t—people in America don’t speak of it, and they did in the ’50s and the ’60s. They did speak about it with great national pride. There’s a question of economics here that we seem to have misunderstood that you, I think, have articulated very well.

KERLIN: Absolutely.

Let me frame up some of the data on the economic return on infrastructure. And this is, again, the first way of looking at it, which is to say, well, what is the return of—and let’s call it a hundred billion dollars of additional infrastructure spending, and that would be a little bit less than a 1 percent increase in the capital stock of the U.S.

So the short-term return, a lot of the data says, would be somewhere between 6 (percent) and 8 percent of that, would be the increase in private sector production, private sector output that you would get out of that, and a lot of the data suggests that long term that actually goes up to 12 percent in a single year.

So what you have here—sorry, 12 percent of that hundred billion. So what you end up with is let’s say it’s 8 percent in your first year. That means you are bringing in $8 billion more to just private sector output. Then, as an investor would, you would look at that over its lifetime and you would say what’s the value of that.

In, simply, the first ten years that infrastructure spending is going to return in terms of increase in private output a hundred billion dollars of infrastructure spending. If you believe those numbers, which I do, ends up bringing in $65 billion of additional private sector output over that period of time, and then you keep pushing it out and eventually it—you know, it fully comes back.

I think the important thing, though, to remember about infrastructure spending, and this is why, to Heidi and Diane’s point, it is so important in the wake of an economic crisis, is that you get double bang for your buck.

So that is a return on investment and you are also putting dollars in the hands of the construction workers and in the huge supply chain that goes into an infrastructure project. Not just transport, but also energy, water, and broadband and other modes. And then you get the broader social impact. One of the examples Heidi was giving in the discussion yesterday was the importance of broadband in a world of remote schooling where you have the broad—you know, like, the effects of the digital divide are felt more keenly than ever. So it is—the $65 billion return in ten years on a hundred billion dollars of infrastructure spending is actually quite conservative.

And then the last point that I’ll highlight to bring out the conservatism and the outsize impact of it is we rarely talk about the cost of not investing in infrastructure, and I’ll give two examples.

One is the Gateway Project on the Trans-Hudson Tunnel and the Regional Plan Association of New York, actually of greater New York, came out with a study that said that a partial shutdown of the Trans-Hudson Rail Tunnel would cost $16 billion over four years in damage. So if you had a shock to the system that forced a sudden partial shutdown of the Trans-Hudson Rail Tunnel, that’s what you would be working with in terms of loss.

That doesn’t even take into account the impact on reduced real estate values and things like that over a period, and we all know how hard the New York metro area has been hit by the coronavirus crisis. Imagine a one-two punch like that. So that is avoided costs that you get from investing in infrastructure.

And then the other good example, which is a tragic example, is Flint, Michigan, and the shortcuts that were taken there that, you know, may have cost—would have probably cost in the tens of millions of dollars.

It is estimated that the cost of the Flint, Michigan, water crisis was $400 million, the total, and it’s all, obviously, impossible to put value on the mortality and morbidity that is associated with that. So, hopefully, that gives you a sense of at least how we, at McKinsey, and many folks think about the economic (returns ?) on these investments.

VELSHI: Your last point—I want to pick this up with Heidi—is the toughest one, right. People don’t think about lost—you know, costs of things that go bad until they go bad. So you brought up Flint. We’ve, obviously, seen it, Heidi, with bridges that collapse.

But beyond that, let’s talk about what infrastructure is. Every now and then in Boston or New York or Philadelphia you hear a story about a house that just blew up because—and it turns out that it was the gas lines. But it was the underground gas lines that had been there for a hundred and fifty years that we don’t think about, right, until a house blows up.

Broadband. I mean, for most of us, we are really grateful during coronavirus that the internet didn’t break. But there are some people in America who have no broadband internet still, and so for them to stay home—they’re already disadvantaged, then they’re staying home from school and they don’t have the same abilities that we have.

What else should we be thinking about other than the really obvious stuff that’s in our face? Because when the commissioner expanded the New Jersey Turnpike, I felt that really directly. But what are the things that we aren’t thinking about that we also need to be investing?

CREBO-REDIKER: So I really—I like the way that Mike sort of took this conversation forward in terms of return on investment because, yes, jobs. Yes, growth. But they’re also—there’s also the core issue of public safety with water, roads, bridges, in terms of the energy grid, looking at competitiveness as well and also an opportunity with climate resilience, which is something that should be part of any thinking of moving forward on investment in future infrastructure.

Broadband is particularly important. If you think about how we might shift our ways of operating on the back—through COVID-19 and on the back of this, we could see some very dramatic changes in the way that we do telemedicine and the way that we actually are doing distance learning, and around twenty million Americans don’t have access to broadband right now.

So, you know, in that digital divide that’s out there, this is something that is really an imperative that could—if we don’t invest in expanding broadband then we could deepen the divide of inequality and the—and really accelerate some very negative trends in this country. So it’s a huge opportunity.

And then we also have to think about mass transit. How are we going to be thinking about mass transit in a—you know, in a new world where instead of scrunching everybody together on a—you know, in an area where people aren’t going to feel so comfortable going back to work on mass—you know, mass transit? Thinking about air travel and how that’s going to look in the future. Thinking about how many cars are going to be—are we going to have more cars, less cars? Because that actually comes down to the funding model. If you’re looking at state and local governments, how they are actually collecting revenue, then that is—that is a very important revenue stream in terms of whether it’s tolls, or taxes, or, you know, how do we actually pay for this?

And so I think that brings us—you know, it brings us to how we actually look at funding models. And the Highway Trust Fund, which is the federal component of that—you know, the bulk of that 25 percent for core infrastructure investment, is still, you know, linked primarily to the gas tax. And it’s been a broken model for years. And it’s been a patchwork solution for years. So as we move forward, we really have to get creative and bold in terms of how we’re going to, you know, fund this big, bold infrastructure renewal, with the understanding that the investment is going to present very positive returns on the—on the other end.

VELSHI: Commissioner, let me ask you about funding. Heidi made the great point that most of the spending and funding comes at the state level. We talk about it a lot when it’s at the federal level, right? We talk about the concept of a great big federal, whether it’s infrastructure bank, or a big spending program, or a WPA-style program. But the fact is, most of the work gets done at the state level. And, you know, one bridge, as you mentioned, is over a billion dollars. So talk to me about the way you think these things should be funded. You mentioned something about a public-private partnership, a way you discussed it. I think it might have been on Exit 12 on the turnpike. Where when you do something that that’s big, there are ancillary benefits not just to the food truck and the workers building it, but there are long-term economic benefits that come from what some people argue is a bridge to nowhere, or an exit to nowhere. Well, actually, you create somewhere out of nowhere when you build these things.

GUTIERREZ-SCACCETTI: That’s correct, Ali. And I would say to you, first, on the funding piece, I agree with Heidi that the system’s been broken for a long time, but unfortunately we’re coming up against the reauthorization wall on the Highway Trust Fund. And so from a DOT perspective, we’re really looking to the federal government to create a longer-term—not a kick the can down the road short-term reauthorization—but something, a longer-term solution. But paralleling that is looking at new ways to fund. As we move to the electric vehicle and we get away from our traditional internal combustion engines, how are we going to actually pivot to funding in that regard?

The PPPs are certainly an opportunity to help fund construction without necessarily the need to take it out of a state or federal funding source. And so the project we were talking about is on Interchange 12 of the turnpike is the Tremley Point Connector project, which opens up a brownfield to development. And so if there’s an opportunity for us to use a public-private partnership to build that, and also be able to do some value capture from the development that comes around that new facility—which is the goal of building this road is to open it up to some clean development—then that helps us pay down the cost, the public cost, of the road. It helps the turnpike authority to do more with the money that it is collecting. And it rightly puts some of the cost of it to the people who will benefit most on the private business side of it.

And so we have to start looking at sharing in some of that. Folks have to understand that—you know, it’s like with a transit village. And Heidi, you know, talked about the importance of mass transit. If we permit a transit village to be built around a transit station, that transit village has tremendous value to people who no longer want to own a car. They want to be able to move by mass transit, bike-ped, not necessarily in a vehicle. That has great value. And we have to learn how to leverage that in government so that we can get more done, right? So we will never run out of things to do in infrastructure, on any front—whether it’s broadband, water, transportation. Those are foundational government opportunities.

But I think at the end of the day we have to be better businesspeople sometimes and be a little bit more inclusive into how we draw that revenue source in. And so that’s part of what we hope to do with the Tremley Point Connector project. Certainly, what I-4 connector—or the I-4 project in Florida is doing in terms of the widening of I-4. That’s a public-private partnership. Big projects, big numbers, but certainly getting the private sector to participate with us. And one point that we talked about, and I think Mike may have raised it, in terms of the market—and you had said it in the beginning—there is capital out there. And so I hear a lot now about, well, the credit markets may be very resistant to lending money. They may not want to, you know, really be out there with some of what they consider to be more difficult municipal bond issuance.

What we learned in 2008 when the Build America Bonds were done is we didn’t think we could raise 500 million, 700 million (dollars) to widen the turnpike, as you discussed, from 9 to—the central part of the state, from Interchange 9 down to 6. We actually were able to borrow almost three or four times more because the market was very interested in revenue bonds that created that backstop, that they knew that there was a revenue bond dedicated to payment of the debt service. And I also think they understood the importance of lending money to the infrastructure market generally to kickstart the economy. And so we were pleasantly surprised at the response to the markets when we did that bond issue.

VELSHI: You know, Mike, it’s interesting, because right now airlines and Boeing are doing bond issues. And I could certainly understand why one would think that’s a risky endeavor. But with a lot of these infrastructure projects, not particularly risky. Obviously, cost overruns are a big risk, but really even in other parts of the world the major risks tend to be political risk. And places like the World Bank have figured out way to—you know, to deleverage some of that, or to create investment-quality opportunities. Are there best practices that we could employ better here in the United States, that you see elsewhere in terms of funding large projects, given that there’s capital out there, given that there would be demand for most of the things that we’re talking about?

KERLIN: Yeah. It’s a good question. I think a couple things. One is I completely agree with the commissioner’s point about there being those resources out there. Pension funds in particular, folks with long-term liabilities, love to have long-term, predictable, stable cash flows to—with which to fund those liabilities. So those—and that’s just one example among many—insurance companies, sovereign wealth funds, and many other institutional investors, university endowments, tend to like infrastructure for those reasons. So absolutely the resources are out there.

I would lay out a few things in terms of what investors look for in projects that the U.S.—and it’s often at the state level—that the U.S. can do even more. And Diane is doing much of this in New Jersey, and other states are making good progress on this. One is just having very, very predictable cash flows to pay debt service, right? And to give equity upside to any equity investors at the table. And that can be done in a few different ways. One is obviously with—again, and sometimes people talk about the three Ts of funding: tariffs, transfers, and taxes. Let me focus more on tariffs and taxes.

So on the tariffs side, creating—making sure that to the extent possible, and it varies by infrastructure mode—the extent possible that you can be—that you can recover the costs of operating infrastructure. But making sure that the public is—you know, is paying, based on whether it’s tolls, based on things like tax increment financing, so that there’s some internalizing for the government of the positive externalities that, you know, real estate holders near a new interchange, for example, are getting. So one is making sure that there are very predictable tariff flows and that, to the extent possible, those are cost reflective.

Two is, even predictable tax payments can be quite helpful for infrastructure investors. And I’ll give one example, which is in Los Angeles there were approvals—voters approved sales tax increases in 2008 and then again in 2016 that brough in a billion dollars a year for rail and mass transit. Now, anyone who’s ever lived through a traffic jam in the Los Angeles area knows how valuable this is. And that $1 billion you might say, well, gosh, what can $1 billion really fund? But that’s $1 billion for additional debt service on an infrastructure investment. And so if you assume the attractive interest rates that we have today, a billion dollars a year in debt service can actually get you very far in terms of capital—

VELSHI: A thousand years of debt service or something at zero. (Laughter.)

KERLIN: Exactly. Exactly. So those two, I would say, are the first two. And then the last one I would say is assignment—doing what the government can do best to help. And let me lay out two pieces of that. One is, absorbing the risks that the government can more easily absorb, right? And sometimes those will be project execution risk, because the government can play a part in easing project execution, obviously, while protecting vulnerable people and the environment, and also sometimes financing risk, to be able to—because the government has more tools at its disposal, can take some of the risk. For example, in a toll road, if traffic falls below a certain level, the government can say, well, we’ll backstop that.

And obviously the government should not be putting itself at too much fiscal risk, but there are some risks that a government is better equipped to take on than a private-sector player. And so allocating those—allocating the best risk to the private sector and the best risk to the government in terms of how you structure that is very helpful.

And I would say a last thing that governments can do is bundling of projects. One of the big things that infrastructure investors and operators struggle with is when it’s a small one-off project in one place, the amount of management effort, legal fees, and things like that that they have to invest to get that one project done may not be worth it.

If you have a bundle of projects—and Pennsylvania did this with their rapid bridge-replacement program that attracted a lot of P3, successful public-private-partnership interests, is they bundled a whole bunch of bridge replacements together. And when you bundle that together, suddenly it has the scale to be interesting for investors and operators. And then those folks compete with each other and give the government a better deal.

VELSHI: I want to open it up for questions from participants. And Julissa’s (sp) going to let me know when we have questions that we can take.

Meanwhile, Heidi, I want to ask you about—you know, I’ve been so excited at various points really in the last ten years because infrastructure has bubbled to the top as an issue that people should embrace politically. So the commissioner and commissioners across this country are busy with projects which they’re raising money for through bond issues or through tolls or user fees or public-private partnerships, and stuff’s getting done.

But, you know, there have been efforts at the federal level to try and make this exciting and interesting and something people can sign on for. And in this administration alone, I’ve lost count, but at least there were three or four infrastructure weeks that started off with a big bang at the White House, with trucks, and—

CREBO-REDIKER: And even more. (Laughs.)

VELSHI: —construction workers, and more. There are lots of reasons why infrastructure investment is and should be bipartisan, right? It creates jobs. It creates efficiency. It creates competitiveness. It allows the private sector in. It gives the government the kind of—as Mike just said, the risk that governments can take on. It has all the ingredients of being this great bipartisan stuff.

We’ve seen so little bipartisanship. We saw it with criminal justice and a couple of other things. Why does this continue to fail to succeed at a federal level, on a large popular level?

CREBO-REDIKER: So absolutely, everybody loves infrastructure. There’s sort of topline agreement that it’s good for all the reasons we’ve gone through. And then you get one layer down to the details, and that’s where you get this split. And you get, you know, who’s going to pay for it? How are the funds going to be used? Where are the funds going to be used?

And I think, you know, not all Republicans, but many, many Republicans tend to find their—you know, their deficit-hawk religion when it comes to paying for infrastructure, whereas maybe not so much for tax reform. So it’s one of those things where you have these—you know, these splits about the three things I just mentioned.

You also have, you know, federal-versus-state divisions. And then you have urban versus rural. So P3s are great. They’re actually a very, very, very small fraction of the overall investment going into transportation infrastructure right now. Should it be much more? Yes. Is it a silver bullet? No.

So, yes, I’ve been on the bandwagon for promoting P3s for a very, very long time. But it is not—it’s not the magic—it’s not the magic wand I think a lot of people think it is, even though we have a lot of capital that would be, in theory, interested in investing in the right type of infrastructure investment.

When President Trump came out with his huge, ambitious infrastructure initiative, it was focused almost entirely on private-sector investment, and it put a lot of the onus on the states. And, you know, the states, as we started with, are already shouldering the vast bulk of the burden of the investment in infrastructure.

So if you—so we do need robust public funding. And not every—you know, not every infrastructure project is going to be a commercially viable one. Many rural ones are not commercially viable. So you have to sort of think about what is the right—you know, what is the right framing of the challenge. And then this is a great opportunity that we have right now because of where the cost of funding is.

So this is, I think, a really pivotal time right now where we could, after we see—again, after we see the kind of firefighting support that we need right now, planting the seeds for what, you know, could be a great way to get our economy back on track again.

But it’s not looking at, you know, a silver bullet here being just the federal or a silver bullet just being the states or a silver bullet just being—it’s kind of a buckshot approach. It’s—you know, you look for the silver buckshot in all of these different areas and then you make sure that whatever that money is going into is smart. You’re going to get that growth in employment on the back side.

VELSHI: I’m going to hand it over to Julissa (sp) for a section—a session because—for a question we have from the audience. Julissa (sp)?

STAFF: Sure.

(Gives queuing instructions.)

We’ll take the first question from Tom Clark (sp).

Q: Thank you, and good morning.

Just hearing the discussion of the policy prescriptions we could look to, I wonder, if you step back and look, you know, around the world globally, there are examples of multilateral development banks, let’s say, for some of the developing economies; if you look even at the EU, obviously a very developed economy. You have the European Investment Bank.

As you think about, you know, the best practices for mobilizing capital, do you see a role for any kind of similar institutions to catalyze investment in the U.S. infrastructure-development space—(inaudible)—difference there? I would just be curious to get your thoughts. Thank you.

VELSHI: Tom (sp), it’s a great question. Who’d like to tackle that?

CREBO-REDIKER: I’ll give it a shot since I’ve been a huge supporter of the U.S. establishing its own very specific type of infrastructure bank that is modeled on sort of the best practices of many of the developed-country infrastructure banks. So it’s not just the European Investment Bank, but there are national developed-country investment banks.

I mean, you can look to what McKinsey helped with create for Canada, P3 Canada. And, you know, what you want to do is be able to catalyze more private investment into infrastructure by using, you know, the types of models that, believe it or not, we already use in the U.S.

We have a program called TIFIA, which is within the Department of Transportation. It’s almost like a mini-infrastructure bank, but it’s very—you know, it is constrained by the types of investments. So it’s not—it doesn’t cover water, you know, a number of other—it’s constrained. But it’s really—it’s a really good idea. It’s been working for a long time.

And so, you know, what you could do if you scaled that up is you could have cross-silo; you know, focus on national relevant projects or regionally relevant projects that are not so easy for states or local governments to do cross-state; complement and not replace the existing system that we have in place in terms of financing mechanisms, particularly the muni market. And we can depoliticize it, which I think would go a long way to getting public trust back in the way that we actually are funding infrastructure.

Many different—you know, there are a lot of good ideas about how to do this out there, but they sort of need to tick the boxes that get past that political divide on how we actually do infrastructure. I think we’re one of the only countries in the world that doesn’t actually have a national infrastructure financing mechanism of some sort.

GUTIERREZ-SCACCETTI: So, Ali, just to follow up on what Heidi said, New Jersey actually does have a New Jersey Infrastructure Bank. It has a water side and a transportation side. And many times we can cross-collaborate. So if we’re doing a road project, we can also get water projects done at the same time. If we’re milling and repaving a road, we may take it up curb to curb to be able to put new water infrastructure in and leverage that bank to really help counties and municipalities get work done that they otherwise could not afford. And the way they get it done is they leverage it against the municipal and county aid that is provided by New Jersey Transportation Trust Fund. And it is a phenomenally strong tool. The transportation side of it is relatively new. The water side of it has been working well for many, many years. And so you know what Heidi is saying is you take something like that, which is obviously just a microcosm of what would be much larger, much more macro for the country, and we could really start looking at replacing a lot of the aged infrastructure, especially the underground infrastructure, that tends to cause at times many, many transportation problems, as we know. So, I mean, I agree with Heidi 100 percent. An infrastructure bank that is broader that TIFIA would be very beneficial to states generally.

VELSHI: Mike?

KERLIN: Just the one thing I would add to that that I would say the multilateral development corporations I think have done particularly well is support for project preparation. So the international finance corporation has been quite successful in building these kind of just out of water packages for countries, and even—and states in developing markets for renewables, financing, and renewables auctions that have cut a lot of the friction of getting those—getting those projects, where those projects were treated as each one needing to be bespoke. They basically developed a very consistent package that countries are adopting. And that future, to my point earlier, gives investors predictability. Investors are used to sort of seeing those terms and things like that. And so figuring out ways to support the states even more so on that project preparation side, so each one isn’t starting as much from scratch. Now, of course, states do borrow best practices from one another a ton, and they replicate their own things. But I think there’s even more potential for that.

VELSHI: Commissioner, I want to talk to you about user fees and highway widening—which, you know, to some people it sounds like that’s terrific because there’s time you’re not going to spend in traffic, and that’s time that you get back to yourself, because we still remain a communing nation. Recently there was some pushback against the New Jersey Turnpike toll hike from people who—you know, they had various criticisms about it.

But one of them is interesting. And that is—there’s a view that we need to improve our roads and improve our bridges. And I think everybody expects that roads and bridges shouldn’t crumble and be decrepit. But there are others who are saying: Are you encouraging a sort of behavior in which we are 5 percent of the population and we consume 25 percent of the world’s oil, in a world where we should be thinking about being more energy-efficient? How do you, as a transport commissioner in a state that is a driving hub, and an air hub, and a rail hub, how do you reconcile and deal with the increasing concerns around the environment?

GUTIERREZ-SCACCETTI: So, and let’s add to that a port hub. So when we think about it, first and foremost in the turnpike’s plan is to maintain its state of good repair. The one thing that’s important for people to understand about toll roads generally is they do not receive state or federal funding. They run as independent businesses that run on their user fees. And so they also have an obligation back to bondholders and certainly credit rating agencies to keep their infrastructure in state of good repair, because not like—unlike anything else, if that system cannot produce the revenue it projects, it’s a massive issue, right? It’s a bondholder issue. It’s a covenant issue. We have to be very careful with that.

But in terms of expanding capacity, yes, we always have our critics because people feel that, well, if you widen a road you are creating either induced demand, you’re drawing people to new areas of the state. New Jersey’s very small. I would argue to a large extent that that demand is already there. And so the projects that we’re looking at, in terms of capacity improvement—you know, engineers like to call them widenings, like, because you’re going to make the road bigger—we have to pivot to not necessarily just looking at capacity improvements as additional asphalt, but part of our plan will be to look at capacity improvements through different transit techniques, opportunities for bus rapid transit. If you look at the innovation challenge up in the Meadowlands using new techniques—whether it’s ultralight rail or some type of monorail system, that we can get people to different events and different venues without ever being in a car.

We do not—as a turnpike authority, as a state, as a DOT—we cannot simply advocate for more cars. We have to advocate for the movement of more people. So I argue sometimes we will become the department of mobility at some point in time, as opposed to transportation, but we have to always remember that at least today in this country, if we get product it moves on a truck. And so if you look at the New Jersey Turnpike specifically, the truck traffic that that facility moves, it may be 17 percent of our actual traffic but it’s maybe 35 or 40 percent of our revenue base, because we are taking from the airport, from the ports, and we’re moving that product not only in the region but throughout the country.

And so we have to be able to take that capacity. So we were very prudent in terms of what we look at as additional asphalt. I’m keenly aware of the need for us to reduce carbon—our carbon footprint. Transportation is probably the biggest sector that needs to address that. So we are in the process—we will have 76 charging stations at our service plazas on the turnpike and the parkway so that we can encourage electric vehicle usage, and people will feel less range anxiety. And then we will look to expand that to our transportation fleets throughout the state. And then we will expand it greater to our bus fleets. So, yes, we have to raise money through tolls. That is how we fund those projects. But we are not blind to the importance of being good environmental partners as well.

VELSHI: Yeah, there’s a spot on the New Jersey Turnpike next to Newark Airport where the Department of Mobility could be headquartered, because you have one side the airport, you have rail in front of you, you’ve got the New Jersey Turnpike, you’ve got all of those trucks going, and over to the side you see the ships and the Port of Elizabeth. And that is sort of the story of transportation in New Jersey. You’ve got absolutely everything there.

GUTIERREZ-SCACCETTI: There is a phenomenal photo of that, Ali, where you look at the multimodal nature of Interchange 14.

VELSHI: It’s kind of incredible. I’m never amazed—I probably pass that four times a week and I’m never not amazed by, wow, we move a lot of stuff in this country, and in this state, and in New Jersey in particular.

Julissa (sp), we have another question.

STAFF: We’ll take the next question from Spike Young (sp). Please accept the unmute now button.

Q: Actually, that is—this is Beth Ann Bovino from S&P Global. I’m using my son’s iPad. (Laughter.) His name is Spike, not mine. Although he is, of course—

VELSHI: Hey, nice to hear from you, Beth Ann.

Q: It is nice to see you again too, virtually.

A question I had—I’m sorry, I checked in late to this session—but when you were talking about, you know, highway widening, for example, capacity improvements. My question is to all of you, in terms of—you know, given that COVID-19, that we’ve all experienced, and the fear of people traveling on public transport versus sticking to their cars, could that change first infrastructure capacity, maybe a reliance more on expanding highways, or is there another way of changing infrastructure to basically increase the—reduce the fear factor, I guess you could say, in terms of—I guess, infrastructure in terms of cleanliness or—you know, I’m not sure how to describe it. But that’s my question.

VELSHI: Who’d like to touch that? Heidi?

CREBO-REDIKER: So we talked a little bit—or, I talked a little bit towards the beginning about, you know, what we need to be thinking about during this period of COVID-19 and then moving forward, where we have—where we might have to really rethink, you know, how we get people back to using mass transit. What are the safety—you know, what are the safety concerns that we have? And how do we—we need to start imagining that, and putting those into—you know, those new rules and methods of really alleviating concern about getting into a packed space in a pandemic.

Same thing with how we’re going to have rethink air travel, and how we’re going to have to rethink, you know, car use. And, you know, this is sort of uncharted territory right now. But there’s a great deal of need for care, for building—if we’re going to invest money in this. To make the current modes of transportation viable in a pandemic and post-pandemic world we need to be—we need to be figuring that out now, and allocating the resources to pay for that now, because the only way you get people back to work is if you get people going to work. And we also touched on broadband, which is if they’re not getting into modes of transportation to get themselves to work, then how do we—how do we, you know, invest in the kind of capacity building in broadband so that people can work from home if they need to?

VELSHI: I just want to expand on that a little bit, because I—these days I’m driving back forth from Philly, but normally I’m—my two modes of transportation are the MTA in New York and Amtrak, both of which are woefully underfunded compared to other centers of similar size and importance, right? So in China you can go from Shenzhen to—or, from Beijing to Shanghai in five hours. A trip of that length in the United States would take twenty hours and probably some train changes. We weren’t keeping up with mass transit investment like we weren’t keeping up with the rest of infrastructure investment already, and now mass transit, to Beth Ann’s point, is going to be a little bit more tricky, right?

I mean, the airlines have decided that, or at least they’re trying to space people out. It hasn’t happened in the last week, as we’ve seen. But that’s going to—we’re all going to have to start to think about these things. How, in a world where we have not allowed the spending—and by the way, there has been funding, Commissioner. It somehow just doesn’t get to where it’s supposed to be.

How do we change that world? How do we now say we have to prioritize mobility, as you call it, in a way that is safe and in a way that encourages sometimes the least among us who don’t have the privilege to trade in their bus pass or their train pass for a car to be able to travel safely and efficiently?

GUTIERREZ-SCACCETTI: So you’re right, there’s huge environmental justice issues that go—surround the whole transit discussion. I think the federal government in the stimulus packages have really realized the importance of standing up mass transit as it needs to be. But I think some of the work that we’re going to do in addressing this fear factor, right, we fight two viruses.

We fight the COVID-19, which we hope someday we’ll have the right therapeutic drugs and vaccine, but then we also fight the virus of fear, and we can’t individually change people’s minds. It has to be demonstrated through good practices.

And so we’re going to have to look at how do we manage the number of folks that actually get into a train car. How do we have enough staff on a platform to help maintain some reasonable social distancing? What do we do when someone doesn’t have a face covering on, although we’re going to require them to maintain a face covering when they use mass transit?

We’re not used to these kinds of things as Americans. Forget any particular state. We’re used to moving as we wish. And so there has to be a gentle shift, and I say gentle because nothing that we do aggressively ever, I don’t think, at least in my sixty-one years, has ever been successful in getting us to change behavior. But a gentle shift towards changing our behavior and, again, reminding people you wear that face covering not to protect yourself but to protect others from you, and that’s why others wear it. And so there’s a(n) interdependency on some of the behaviors we’re asking people to demonstrate.

Social distancing is to protect everyone. Wearing face coverings is to protect everyone. Will it go on forever? I can’t answer that question. Will it go on through the end of this year? I’m sure at least. But I think in mass transit we have to be demonstrating cleaning of the trains while people are on them, that people need to see, right, that’s who we are. We are like the Show Me State as a country in this instance.

We need to see cleaning staff on there wiping down door handles and wiping down buttons and cleaning seats because it gives people confidence. Saying that we do something is a whole lot different than showing people what we do. Those are the kinds of things we’re working on now as Governor Murphy starts to talk about our ability to try to reenter what is our typical day. I don’t even want to use the word normal because I’m pretty sure it’s only a setting on a washing machine.

But I think, at the end of the day, what I’ll call our typical behavior, because this new—this new environment we’re entering into is not one that can—route is based in science as much as it probably is based in art and compassion and the management of human behavior. And so it’s going to take a really interesting skill set to help us get folks confident again, whether it’s a plane or a light rail system or Amtrak or New Jersey transit, to feel comfortable when they’re on that facility that they’re safe, right, and that is something that will take—what we lost in three months will probably take years to restore.

VELSHI: Yeah, to figure out or get right.

Mike, one of the things—we were talking a few moments ago about the people who didn’t like the idea of a toll increase. Obviously, tolls we understand to be user fees. When you use public transit you understand that to be a user fee, even though it’s, generally, subsidized.

One of the comments you made is that this stuff—the idea of user fees, people paying for improved infrastructure, goes over better in some countries than it does in the United States, and the corollary to that is there is an expectation in the United States that everything you use works and works in good order, and nobody ever campaigns to say, you know, we need to spend a trillion dollars on basic infrastructure improvements. Not even improvements, just maintenance.

What’s the mindset shift that needs to occur in the United States? Because we expect it all to work and work well. We have an expectation, which I think is fair, that bridges don’t collapse and things like that. But we don’t really have an understanding of what it costs and how to pay for it.

KERLIN: I think it’s complicated because it is, unfortunately, those tragedies that cause the public to support government investment in certain areas, right. And so, for example, public health infrastructure. I’m sure the public will be much more supportive of investments in public health infrastructure, and I think on—after the coronavirus crisis or even within the coronavirus crisis.

In the world of infrastructure, I hope it does not take another disaster like a bridge collapse or a Flint, Michigan, or issues on the—across Hudson Rail Connection to drive this. However, you know, unfortunately, bad things will happen and those do need to be highlighted and people need to understand.

But I think it’s more helping the public understand the return on investment, some of those numbers I shared earlier, and figuring out a way to make them compelling and to get them into the public’s—in a simple way, into the public’s mindset.

Now, again, a recession is a great idea. Not a great idea but a great—everybody says let’s don’t let a crisis go to waste, and I think in a moment like this the public is likely to be more supportive. And so, again, I’m not—we don’t do policy at McKinsey but I think there are opportunities to think about what are the long-term infrastructure commitments that can be made by the public while there’s a moment—or by the public sector while there is a moment of the public probably understanding that two-for-one double bang for your buck that you get in terms of infrastructure spending, putting cash in the hands of Americans to help those Americans with their basic needs and to ensure that those folks are spending money in both the small businesses and even some large businesses that have been suffering so much, and then also that there is a real return on investment in that spending.

And so the extent to which that story can be told simply I think will go (a long ?)—

VELSHI: And, Heidi, actually there’s more to that because the return in this moment financially is just greater because of the cost of money.

CREBO-REDIKER: That’s right. I think it’s really a no-brainer right now. I think it’s a great opportunity and it’s going to be—this is one of the greatest economic challenges our country has seen. And so to the extent that we have the political will to actually get there and that is—you know, that’s still an if, I think that there is—you know, I agree with Mike. There’s probably a lot more public support for the investment in getting construction workers back to work and getting—you know, getting people—you know, all of the spillover effects that you get from infrastructure and small businesses and in new developments. You know, new places to live and new places to work.

And it is a—this is a moment in time where we have both the ability to fund at very—you know, at minimal cost to get a really great return and a solution to what is going to be the biggest challenge that we face for the next—you know, hopefully, not for a long, long time. But we’ve got to get our economy out of this, you know, and I think after COVID-19, once we have—once we’re lucky enough to be past this, it’s still going to be a massive, massive haul to get people back to work again. So let’s use this opportunity now.

VELSHI: It’s a perfect way to end this. I am so grateful to the three of you and to all of the participants for joining us. This is such an important conversation at such an important time. I, certainly, learned a great deal from you all.

So thank you for your time. Commissioner Diane Gutierrez-Scaccetti of New Jersey, Heidi Crebo-Rediker of the Council on Foreign Relations, Mike Kerlin of McKinsey, thanks to all of you. Thanks to everybody for joining us. Thanks to the Council on Foreign Relations. And have a great day, everyone.

(END)

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