Originally Broadcast November 3rd, 2007

Washington, D.C.

Welcome to The Business of Government Hour, a conversation about management with a government executive who is changing the way government does business.

The Business of Government Hour is produced by The IBM Center for The Business of Government, which was created in 1998 to encourage discussion and research into new approaches to improving government effectiveness.

You can find out more about The Center by visiting us on the web at businessofgovernment.org.

And now, The Business of Government Hour.

Mr. Morales: Good morning. I'm Albert Morales, your host, and managing partner of The IBM Center for The Business of Government.

Transportation congestion represents a very serious threat to this nation's economic prosperity and quality of life. Whether a truck stalled in traffic, cargo stuck at overwhelmed seaports, or airplanes circling over crowded airports, congestion costs Americans an estimated $200 billion a year. Congestion also robs us of time which is better spent engaged in more fruitful activities.

With us this morning to discuss his Department's efforts to reduce transportation system congestion is Tyler Duvall, Assistant Secretary for Transportation Policy at the U.S. Department of Transportation.

Good morning, Tyler.

Mr. Duvall: Good morning, Albert.

Mr. Morales: Also joining us in our conversation from IBM is Pete Boyer, director of federal civilian programs.

Good morning, Pete.

Mr. Boyer: Good morning, Al.

Mr. Morales: Tyler, perhaps you could share with us a sense of the history and mission of the U.S. Department of Transportation. When was it created, and what is its mission today?

Mr. Duvall: The Department officially came to being on April 1, 1967, to serve the United States by ensuring a fast, safe, efficient, accessible, and convenient transportation system that meets our vital national interests and enhances the quality of life of the American people today and into the future. The short answer, though, I think, is the Department's mission is to cobble together various programs, policies, and regulations, and really ensure that the nation's transportation system is working correctly and safely.

Mr. Morales: Now, that's obviously a fairly broad definition, a very broad area for the country, so how is DOT organized? And can you give us a sense of the scale through the size of its budget, number of employees, its geographic footprint?

Mr. Duvall: The Department's budget in 2006 was about $65 billion. We have about 53,000 employees. A huge chunk of those employees work for the Federal Aviation Administration. So we are organized by mode, for the most part, or regulatory activity. The Federal Aviation Administration, as I said, personnel-wise is the largest. Budget-wise, however, the Federal Highway Administration is the largest. That agency makes out grants to state and local governments for highway construction.

The third largest by budget size is the Federal Transit Administration, which makes grants for public transportation systems in urban areas. And then we have regulatory agencies in the areas of pipeline safety, railroad safety, hazardous materials safety, and we also then have what's called a research organization, the Technology Administration, that's a standalone agency intended to bring together all the research activities of the Department.

As you mentioned, the scope is extremely broad. And in fact, that has been the single biggest challenge for the Department in its 40-year life, is to really integrate these modes of transportation under a common idea and common policy.

Mr. Boyer: Tyler, now you provided us with a sense of the larger organization. Could you tell us more about your area and role within DOT? Specifically, what are your responsibilities and duties as the Assistant Secretary for Transportation Policy? And could you tell us about the areas under your purview, how you're organized, the size of your staff, the budget, and how it supports the mission of the Department?

Mr. Duvall: My job is to basically be the primary surface transportation policy advisor along with our Under Secretary for Transportation, Jeff Shane, who's been at the Department a number of years. He and I provide policy advice, strategic direction to both the Secretary and then we work directly with the heads of all those agencies I just referenced within the Department to set policy direction. We work on legislation development, regulatory development. And we really try to give the Secretary information, advice to guide policy development within the Department.

It's a very small office. We have approximately in my office about 30 employees. On the other side, there's specifically an Aviation and International Affairs Office that does policy in those areas. It has about 90 employees. But overall, we're a fairly lean operation. We don't have significant budgetary resources, but we have a significant mission: to really make sure we know everything that's going on in the Department at all times. It is a classic case of policy interacting with kind of day-to-day operations. And I think the Secretary relies extensively on our office to make sure she knows what's going on in the Department at all times.

Mr. Boyer: As a follow-on, regarding your responsibilities and duties, what are the top three challenges that you face in your position, and how have you addressed those challenges?

Mr. Duvall: Well, the top three challenges are -- I'd say one is because we are not handing out grants, directly regulating ourselves-- the main value we add is our expertise, our knowledge. And to the extent that we are not informed, have not done adequate reading, or not relevant to the day-to-day decision-making needs of the Secretary and all the modal administrations, we simply will not be effective. So the biggest challenge is to stay informed, stay engaged, stay relevant in the activities of the Department.

The other big challenge we have as an ongoing challenge is our budgetary resources. Because they're so limited, our ability to do our own research, to acquire our own policy expertise is limited, and so we have to rely extensively on others throughout the Department.

And I guess the third challenge is really driven by the organization itself, which is because of the diversity of the organization, as you mentioned, it's been called the stovepiping of the Department of Transportation -- that's been the criticism over the years. It's a very difficult challenge to try to integrate the different policies across the modal administrations. So we may be successful in one area implementing policy direction, and then we find that other administrations either are doing different policies or frankly just haven't been integrated successfully. And that's our challenge is to really try to integrate all these different ideas that are kicking around the Department. Because one day you'll wake up and realize somebody's pursuing a policy which on its face doesn't appear to be inconsistent with another policy, but it turns out to be inconsistent. So getting buy-in for all these diverse policies I think is a difficult challenge.

Mr. Morales: Now, Tyler, you came to the Department from the private sector. Could you describe your career path for our listeners? How did you get started?

Mr. Duvall: Well, I graduated law school in 1998 from the University of Virginia School of Law, and started fairly immediately at a law firm here in Washington, D.C., Hogan & Hartson. I worked in the Tysons Corner office doing corporate securities work, and I did that for about 3-1/2 years. Tremendous exposure, a great law firm. I got really, I think, well skilled in the areas of transactional practice, and this is the tremendous exposure to commercial life in the United States, particularly in an area as sophisticated as Washington, D.C.

I started in the Department in the same office I'm in now as the lowest-level political appointee you can be, a Special Assistant to the Assistant Secretary at the time. Longest title in government. At the time, I was basically providing policy assistance to him in his carrying out of the duties that I have now, and writing speeches, preparing policy statements. The exciting thing about it at the time that I joined the Department is it was the beginning of I would say the ramp-up of the debate over the first surface transportation reauthorization legislation at the federal level, something that eventually became known as SAFETEA-LU. And so it was a fascinating exposure to big legislation. This became a $284 billion piece of federal legislation that obviously has huge impacts across the surface transportation system. So I was the primary policy development person for the Assistant Secretary on that bill and it was just a great, great experience doing that.

And then I got promoted in October of 2003 to become the Deputy Assistant Secretary, and I held that position for a number of years. Became the Acting Assistant -- I've basically held every political title in the Office of Policy right now other than the Under Secretary.

Mr. Morales: That's fantastic, Tyler. So tell me, how have these various experiences prepared you for the current role that you have right now? But more importantly, how do you think it has shaped your management approach and your leadership style?

Mr. Duvall: Well, policy is an area that, in my view, in government, you really need to have some legal understanding. I'm not saying you need a law degree. I'm fortunate to have one. But I think you need to understand the law. The law obviously drives so much of the policy in government, and obviously, we are creatures of the law. At the end of the day, we only exist because of it. And I think to really understand how statutes work, how to implement those, and then how, frankly, agreements are enforced, property law, contracts, those are fundamental underpinnings of doing policy. And particularly in the area of transportation where you have so much commercial activity, I think that that commercial training was very important.

And then I think the other kind of area that I've become a passionate learner, I think, of is economics. I was an economics major. I think economics forms an underpinning of much of our legal system, so I think those two areas have really guided my thinking, the way I approach problems. And I've found that others who approach these problems come with similar educational backgrounds, come to similar conclusions about policy solutions. So educational training and legal training I think are fundamental.

And then I think from a management perspective, because our office is so small and because we're not implementing programs, my approach has been to really liberate creative people, is to try to turn our office into kind of a think-tank within the Department, to really embrace people who are coming forward with creative ideas. Our main value to the Department is adding thoughts, concepts, asking tough questions. And if we are not doing that, if we're simply kind of coming in and reading the mail, I think we are not going to be an effective office.

So my management style has been somewhat loose in terms of welcoming and accepting of people to come forward with different ideas, but also really challenging and going towards trying to identify the people in the office that are willing to do the tough work and the creative work. This is the beginning of a new era of transportation and policy in the United States, and our office has got to be I think willing to be at the forefront of that change.

Mr. Morales: Excellent.

What is congestion pricing? We will ask Tyler Duvall, Assistant Secretary for Transportation Policy at U.S. Department of Transportation, to share with us when the conversation about management continues on The Business of Government Hour.

(Intermission)

Mr. Morales: Welcome back to The Business of Government Hour. I'm your host, Albert Morales, and this morning's conversation is with Tyler Duvall, Assistant Secretary for Transportation Policy at the U.S. Department of Transportation.

Also joining us in our conversation from IBM is Pete Boyer.

Tyler, what is congestion pricing? And sometimes this is called value pricing. And can you elaborate on the four main types of this congestion and value pricing strategies? And can you elaborate more on what are the benefits of congestion pricing, and highlight perhaps some examples in the U.S. where this is being put into place?

Mr. Duvall: Albert, thanks for the question. This is one of the top policy priority areas that the Department has been talking about across all modes of transportation, and that's a new approach to dealing directly with congestion. And before I answer what congestion pricing is, I think it's important to note why we have congestion. I mean, as most economists have long understood, it's a basic supply-and-demand imbalance in which you have a fixed set of supply for something, a network, any network -- it does not apply only to highways or aviation -- in which you have too much demand relative to the available supply at the certain periods of the day, or across all periods of the day. It results in lines. We saw those lines in the '70s when we had rationing of gasoline. We see those lines in other areas of the economy in which there's too much demand at a given level of supply. So what we have said increasingly is that this concept called "congestion pricing," in which prices vary based on time of day, based on demand levels, to ensure some flow conditions on the facility.

So say you have a highway that you want to achieve a condition of 50 to 55 miles an hour at all times. Currently, during peak periods, for instance on the Capital Beltway, you're 10 to 15 miles an hour. What we have said is pricing can basically provide the signal to users about the scarcity of the available supply, so that during 8:30 in the morning, it costs a lot more to be on an urban highway than it costs society to be on that highway at 2:00 in the morning. In fact, the average number is -- it's about $1 per mile is the cost that you and I are imposing every day when we drive on an urban highway during peak periods. Without some price mechanism to basically send a signal to drivers about what the true costs are of traveling during those periods of the day, users obviously take advantage of the fact that the prices are significantly lower than that. In fact, the average price to be on the Beltway during peak periods is about 2 to 3 cents a mile.

So what we have said is with technology, we can now basically charge drivers the true cost of driving, the true cost of that scarcity of being on a highway during peak periods. And as I said, the prices will vary based on traffic levels. So in peak periods of the day, you see prices can rise substantially, and in other periods of the day, prices can be reduced substantially. And I think our position is that this is a far more efficient way than the alternative, which is right now rationing or queuing. Basically, we wait in line as a way to allocate this scarce resource. And the reason that is, in our view, inefficient is because certain people have very high values of time; other people do not. We're very different. Preferences are very different for time and reliability, and that without some price mechanism, we have no means to basically differentiate among people's preferences.

And so, again, thanks to technology, we now have mechanisms in place in the U.S. and around the world to use pricing, either through a schedule -- one road in Southern California today has a schedule that basically varies the price every 30 minutes based on demand levels. It can get up to $9 during the peak of the peak to take a 12-mile trip. It can lower down into the 50 to 25 cent range for off-peak. We are seeing that happen around the globe as well. Several major European cities have implemented this concept of variable or direct pricing of highways during peak periods. The city of London has done it. The city of Stockholm has done it. The city of Singapore has done it. All with tremendous success.

And I think one of the issues is that people, I think, before they see this implemented, do not really believe that people will respond to prices. And what we have found is that people are actually very highly price-sensitive, that if you give them some opportunity to shift trip times between an hour or even two hours, you see huge increases in traffic speeds. One study that just came out showed that on average about 40 to 45 percent of the people on a rush hour highway in an urban area are not commuting, that they're taking some other trip. That doesn't mean it's all discretionary, but the number that the Secretary of Transportation Mary Peters has quoted is that about 25 percent of those trips are taken by people who are retired.

So what we'd like to do is really start to figure out what people's true preferences are for traveling at high speeds. We now have the technology available to do it. And the Department has offered an enormous amount of both financial and technical assistance to states and localities that want to explore this.

The same concept, however, applies on all of our other network utilities. And I think people's understanding of how we pay we pay for electricity directly. In fact, there are numerous electricity providers in the United States that provide obviously price benefits to people who use electricity during off-peak. We're seeing in the Northeast the electricity grid moving towards congestion pricing because of the same problem. And now in aviation we're seeing the same issue arise. The airports in the New York/New Jersey area are some of the most congested in the country. We've seen huge delays. And I think at the end of the day, those delays really are a reflection of the fact that prices are not correctly set to align supply and demand.

So the technology, though, is the key underpinning. This was known as far back as the mid-1950s. An economist named William Vickrey, who ended up winning the Nobel Prize, kind of the godfather of this concept -- he asserted that this would work. The problem is before the last 5 to 10 years, we just didn't have the technology to implement these things.

As your question notes, there are different types of pricing. You can basically do pricing based on just a flat rate -- you pay X-dollars to use this highway all day long. You can have variable pricing based on a computer that reads how much traffic is on the road at that time and adjusts prices accordingly. You can have a schedule in advance. We want states and localities exploring all these different mechanisms. And we also want them to look at integrating their other transportation policies: transit policy, policies of employers to allow telecommuting. And then the information itself, we are seeing a proliferation of real-time traffic information being provided directly into automobiles. All of that is going to work together to improve the performance of our existing transportation systems.

Mr. Boyer: Now, Tyler, on a related topic, would you tell us about the DOT's national strategy to reduce congestion on America's transportation network, also known as the National Congestion Relief Initiative? Specifically, could you give us a brief overview of the six-point plan to reduce congestion in the short term, and to build the foundation for successful longer term congestion reduction efforts?

Mr. Duvall: Yes. About January of 2006, the Department's senior leadership got together off-site and had kind of a moment in which we said we need to decide what we're doing here for the next several years, or the remaining several years of the administration. And at the time, the Secretary of Transportation was Norm Mineta, our Deputy Secretary Maria Cino, really brought the Department together and said we need a strategic focus on the most serious issues, the most pressing problems.

And one of the problems throughout the Department is our continued need to focus on what's the most important thing. And in government, as you all know, day-to-day crises can always consume your time to focus on the serious problem. Everybody has known congestion has been a growing problem. We knew that obviously at the beginning of the administration. Previous administrations have known that. But I think what we concluded is you need to really focus directly on that as the problem. In fact, the Department's strategic plan at the time was -- mobility was kind of the strategic objective. And what we said was of course, mobility's the objective, but the problem is congestion. And so we rewrote the strategic plan to focus on congestion.

And then we said let's come up with a direct, implementable plan related to congestion. And we said where are the problems the most serious? And first and foremost, urban areas, obviously metropolitan areas. The surface transportation systems of those areas have experienced rapid decline in the last 30 years in their performance. The Texas Transportation Institute is the leading annual entity that observes the cost of congestion, and we've seen just a 300 percent increase in time delays and wasted fuel in the last 25 years.

And what we did is we said let's cobble together whatever resources we have to offer them out to cities, major metro areas, to basically compete for these innovative solutions. And we called it the 4 Ts at the time: tolling, variable pricing of highways; telecommunications technologies basically to provide better information; transit to basically provide more efficient use of transit during rush hour; and then, as I said, telecommuting, encouraging employers to use flex scheduling much more than they do today.

So we said here's the basket of ideas we have to deal with congestion. Here are the resources we have available to us. And we said to cities in America, compete for these resources. Ultimately had about $1 billion in discretionary resources that we cobbled together from a wide array of departmental programs.

And this goes back to my original point. This took a lot of interdepartmental coordination that had never really been done before. And we got approximately -- I think 26 cities applied for funding. Several months ago, we selected five major U.S. cities New York, Seattle, San Francisco, Minneapolis, and Miami to be the award recipients, and we are now in the process of implementing this. But that was the objective there, was to focus on metro areas with the strategic emphasis on congestion.

We then said, well, where else is the congestion threat most serious? And we said I think along interstate trade corridors, you're seeing huge growth in truck traffic along the major interstates of the United States, both on the East Coast, West Coast, and up the middle of the country. The future effectiveness of the interstate highway system really depends on a different approach to expanding capacity. What we said is we are not going to build 40,000+ miles of interstate highway ever again, but what we do need is a strategic addition of capacity along the most congested corridors. Again, we are going to designate up to five major interstate corridors, multi-state corridors, and we selected those also several months ago. Those were I-95 here on the East Coast, I-5 on the West Coast, I-10 that runs from California to Florida, I-15 that runs out of California, and then I-70, which runs in the middle of the country. We said basically we have got to get the Department's resources and efforts focused on these corridors.

We also said, however, that funding of these capacity enhancements in these corridors will not take place using traditional mechanisms. So what we're going to do is try to organize an effort, reach an agreement basically with these multi-state areas to finance and build these projects in a completely different way using tolling -- we think direct user fees are going to be the wave of the future. In fact, every single project over $500 million in the United States right now that's in the planning phases is projected to be a toll road. So in many ways, new capacity projects, that is already the dominant model for providing.

We also think private capital is going to be central to expanding capacity in the U.S. We have seen in the last two years an enormous growth in interest by the private sector. Long-term institutional investors, pension funds look to infrastructure as a new asset -- an emerging asset class is what they call it. And I think they're now recognizing that highways, airports, and seaport infrastructure are central to that. So what we are trying to do is cobble together what I would call financial packages and process streamlining packages to these major interstate corridors, and that will be ongoing for the next several years. We hope to enter into agreements with each of these corridors by spring.

Those are the two main areas that we focused on initially. We had four other components, as you mentioned. Aviation congestion was another huge area of focus. We've got a big pending reauthorization proposal in front of the United States Congress that would overhaul the way we finance aviation systems in the United States, with the clear benefit of reducing aviation congestion.

We then also focused on borders. It is clear that border crossings and ports of entry in the United States are major problems. You've got a lot of container traffic that's grown with trade with China and the rest of Asia in the last 15 years that are creating a massive amount of bottleneck problems at these ports of entry. So we wanted to really focus resources there. And then last, we really wanted to stress more of an educational effort to stress the operational improvement opportunities for states, that obviously physical capacity is part of the solution, but that technology is going to be a major component of the long-term solution to congestion. And we have got a lot of available technologies now. The only question is how do you get the political leadership at the state and local level to recognize how cost-beneficial these technology investments can be. So we have engaged in a nationwide education campaign to stress that.

Mr. Boyer: Related to the education efforts, some have expressed concerns that value or congestion pricing is inequitable towards low-income motorists, is an invasion of motorists' privacy, and also may lead to adjacent free roads becoming more congested due to diverted traffic. How do you address these concerns?

Mr. Duvall: These are legitimate public policy questions. In fact, I think some in the transportation community have kind of moved too quickly beyond those. And in my traditional cocktail party test, it's clear to me that the public still views these are very important issues.

There are several responses to the low-income point, and the first one is, any question about whether a proposed solution is fair should be compared to current approaches and whether those approaches are more or less fair. And I think there are a lot of arguments as to why congestion itself or declining system performance is not good for low-income people as a policy matter. And I think increasingly what we're seeing in major metropolitan areas is that you've got congestion driving up obviously housing prices, real estate prices that are closer to the work centers, forcing middle- and low-income people to live further and further away. We are seeing, I think, transit policies not precisely targeted to help low-income people as many of them were intended over the years. So it's not clear at all that low-income people are doing particularly well under the current approach to managing transportation systems. So that's the first response is compared to what?

But the second response is also that the price of basically relieving congestion does not need to be robbing low-income people of mobility. And what we had said is if you want to preserve low-income mobility, which we do, targeted subsidies, particularly now using these new technologies, and with transit investments, are really effective ways to lessen the burden on low-income people. We have offered and proposed in numerous jurisdictions that you can basically, through transponders that are now in cars, such as E-ZPass, you can supply credits to communities of people that you want to ensure they have mobility. You can actually even allow them to trade and sell those credits if you supply it to them directly.

The price of ensuring low-income mobility, though, does not need to be that we have a transportation system that collapses. In fact, by implementing policies that do not recognize that people are different and have diverse preferences, we ultimately I think really rob low-income people of the same benefits and ability to move quickly on the highway system. And I think politically what we have found is that public opinion polls show that low-income people use congestion priced facilities just as much as high-income people do, and in fact prefer them at a rate comparable to high-income people. And that's because they have time value as well.

The example that the Secretary of Transportation uses, Mary Peters, is low-income people who may have a child at a day care facility that imposes punitive costs on being late to that facility. That time value is very clear to somebody. If you're going to pay a late charge of $25 for being two minutes late to pick up your child from day care, it's worth it to pay $2 to $3 to get there on time. And I think we just need to recognize that people are very diverse, have diverse preferences, and that if we want to protect low-income people, we can target subsidies in an efficient way.

As far as the question about privacy, I also think that is a very important issue that needs to be addressed directly. We have encouraged states and localities that are looking at this to develop privacy protection mechanisms, to confront the privacy issue head-on, so to speak. In some places of the country, it's more important than others, so I think a national policy on privacy is probably inappropriate. In some jurisdictions, people are more than willing to give up privacy in connection with the benefits that come with free-flow highways. In other parts of the country, you're going to want to see assurances that obviously information will not be used for other purposes. I think our main responsibility at the federal level is to really encourage a rigorous policy debate about that exact question.

What is absolutely clear, however, is that the technology currently available to protect privacy works; that you can develop mechanisms now to ensure that information is not stored, to ensure that information is not shared with other government agencies. If that's your policy objective, that can be done. We recognize that as an issue. We just need to acknowledge that technology advanced to the point to solve that problem.

Mr. Morales: Now, Tyler, you've used the term "technology" several times now. And I only have about a minute left, but I'm curious, can you give us an example of some of the advances in technology that would play into a national strategy to reduce congestion and expand the capacity of the existing infrastructure?

Mr. Duvall: Right. I think that the single most powerful technology obviously from a pricing standpoint is a technology that is currently being used right now on a road in Minneapolis, that has sensors, that basically is reading traffic flows and adjusting prices based on those traffic flows. So as the computer observes more traffic building up on the network, it basically then flashes up on a sign that the price has increased. And as the computer observes that traffic has declined on the network, then prices are reduced. And providing that information directly to drivers through overhead signs will ultimately be replaced by providing that information to drivers through their handheld devices, directly into devices on their dashboards.

So as you're driving around the system you will see basically various routes, real-time prices of those routes, and then also real-time information about what the speed is on those routes. There are several companies in the United States right now that are perfecting technologies to basically provide not just real-time traffic information so that you know exactly how long it will take you to go from A to B, but also predictive traffic information.

What is clear is that drivers in the next 5 to 10 years, and the automobile companies are recognizing this as we speak, it's becoming more of a standard feature on most new automobiles. Information is very valuable to drivers. And I know that even two years ago most of the people I talked to did not go onto the Internet before a long trip to see how long it would take or what the traffic conditions were. Today, that is not true.

The other kind of big technology I think that is worth mentioning is traffic signalization technologies. One of the banes of many urban drivers is the lack of synchronized signals as they drive down city streets. That is also simply a problem of lack of technology deployment. The technologies exist now not only to synchronize traffic signals more efficiently, but also to read traffic conditions themselves and synchronize. Again, though, the question is not whether the technology is available, but whether you can get the policy and the political leadership to understand that these are really good investments to make. Too often, I think these investments are competing against other investments that don't provide the same benefits to drivers.

Mr. Morales: Great.

about the increasing interest of private sector investment in U.S. highways and public transportation systems? We will ask Tyler Duvall, Assistant Secretary for Transportation Policy at the U.S. Department of Transportation, to share with us when the conversation about management continues on The Business of Government Hour.

(Intermission)

Mr. Morales: Welcome back to The Business of Government Hour. I'm your host, Albert Morales, and this morning's conversation is with Tyler Duvall, Assistant Secretary, transportation policy, at the U.S. Department of Transportation.

Also joining us in our conversation from IBM is Pete Boyer.

Tyler, how do you account for the increasing interest of the private sector investing in U.S. highways and public transportation? Specifically, what factors lead to the rise of private sector interest in financing U.S. surface transportation infrastructure?

Mr. Duvall: This is, in my view, one of the most exciting and fascinating areas of policy right now in all of government, and obviously within transportation, I think it's one of the most important policy issues. There is a confluence of factors that have taken place in the last I'd say 18 to 24 months that have really propelled us to this point where the private sector around the globe is looking to invest in U.S. infrastructure: highways, airports, seaports, and public transportation systems.

First and foremost, I would say, is the declining state of the nation's transportation systems. The performance that I referred to, the congestion, the growth in costs associated with the transportation system failures, have really propelled state governments to look for new ways to invest in those systems, to expand them, to manage them more efficiently. At the same time that is happening, there's been a flattening out obviously of revenues associated with taxes that traditionally go into transportation, and those include gasoline taxes, diesel taxes. We are seeing, frankly, for the first time in about 30 years, a flattening of travel demand in the United States that's producing fewer revenues for state governments. So the revenues available to state governments to improve these transportation systems has flattened at the exact moment that the private sector around the globe has started to amass capital for long-term investments.

And so as I mentioned earlier, major pension funds across the world, major long-term investors, are really looking at infrastructure broadly, but transportation specifically, as a good intermediate investment tool between, I would say, a real estate investment and a Treasury bond. And so if you can earn returns in the 9 to 14 percent range on these assets, you can really supply very stable revenues to investors over a long period of time. And by "long period" I mean 40- to 75-year investment horizons we're looking at here. So these things have all come together.

And then I think the other critical component is what we were just talking about previously, the technology to charge people and generate those revenues has emerged also within the last two to five years in a very exciting way. So it's really just this confluence of forces that have emerged at the exact moment.

Now, the policy and political issues are substantial, and we at the U.S. Department of Transportation have focused heavily on ensuring obviously that the policy mechanisms done to do this are done in a way that benefits drivers, users, and investors obviously are part of this, too. And I think if I had to kind of rank the policy issues, the first and most pressing issue is how do you regulate the pricing of the system itself? And we have seen in other areas, obviously regulated utilities like telecom and electricity, that you've got a private entity that provides the core service and then a government entity that regulates how they price it and how they charge for it. Through contracts, long-term agreements with the public and private sector, the same mechanism is emerging in transportation.

So several major transactions have already been completed -- one in Chicago, one in Indiana -- for existing toll roads. And these are long-term leases of those roads to the private sector in exchange for very large up-front payments of cash that the public sector can then reinvest in other things. We are seeing major development of new highways. The state of Texas is building a number of extremely large new highways using extensively or entirely private capital to pay for the up-front cost. And in fact, some of these private entities are actually paying Texas for the right to construct these facilities.

The most important policy question is, do the prices that are prescribed or regulated under that contract, do they relate to the cost/the risks of investing in these assets? Do they provide a windfall to the private sector that drivers bear the cost of? And I think what we're seeing is the emergence of a regulatory regime through contracts, and that includes basically regulations in the contract dictating what prices can be charged and when they can be charged. And we have obviously been supportive of ensuring that the public interest is protected in connection with these. But what we don't want to do is constrain the innovation and the development of infrastructure by unnecessarily regulating state and local governments.

And we've got a large tension I think emerging at the federal level about what is the role of the federal government in regulating these transactions at a state and local level. And I think our view in the administration is that governors, state leaders are well-equipped to judge the public interest considerations on their own, that the federal government's role should basically be to disclose information, provide expertise. And to the extent we're providing grants or loans to those projects, which is something that we do, that we insist on the public interest factor is being taken into account.

So it's a very exciting time. The conservative number I've heard is that about $100 billion of capital has been floated around the globe in equity that could be leveraged up to about $400 billion. So there is tremendous money. The real question is can you get the policy framework correct to deploy it into the system?

Mr. Boyer: Tyler, as you previously mentioned, the Urban Partnership Program is part of the Bush Administration's comprehensive initiative launched in May 2006 to confront and address congestion through the nation's transportation system. Would you elaborate on the specifics of the UPP? And how do the urban partnership agreements enable cities to implement broad congestion pricing or variable toll demonstrations?

Mr. Duvall: Right. This was probably the focal point, the most significant of all the elements of this major congestion issue that we've undertaken. And the Secretary, Mary Peters, announced in August that we had selected five cities nationwide to pursue demonstrations. And I think that's the important point here is that we are at a moment of demonstration in the United States. We have seen tremendous system performance problems emerge in our major cities, as I said. And it's time that we recognize that embracing demonstrations or experiments is what we need to do. We're not announcing that this is a wholesale shift of policy that's needed, but we do need to be willing to experiment.

And what we said to major cities is that we've got four areas of experimentation we'd like you to pursue. And in exchange for that, we'll offer you federal grants, federal loan assistance if you have projects that you need loans on, process streamlining for decision-making, and obviously departmental political expertise, experience, support. That's the package of support we had. We had approximately $1 billion in assistance we made available.

And I think this was one of the great success stories from my perspective was that we cobbled together I think approximately 13 different programs, all of which were considered standalone programs with broad eligibility to improve transportation. And we said -- I mean, these were housed under the Federal Transit Administration and the Federal Highway Administration. And so what we said is let's pool these programs together; invest them on a strategic way, not on a peanut butter approach, as the Secretary says, which is investing small amounts in every city in America. We said let's do a strategic investment to encourage demonstrations.

And the four areas, as I mentioned, that we really want to see these cities focus on is variable tolling. We want to demonstrate to the world that this concept of variable tolling works, that they like it, that the public will accept it. That is the central element of the Urban Partnership Program. And the most comprehensive proposal we got was in the city of New York. Other elements are very important, too. Because what we've said is that highway pricing needs to be combined with a transit policy in urban areas that accommodates free-flow conditions on the highways. Obviously, rail systems are important. We need to keep investing in our rail systems. But once you create free-flow conditions on a highway, you can really expand the opportunity to improve speeds of buses in particular. You know, there's a classic stigma, I think, that a lot of people don't want to ride buses, that they're not clean, they don't function correctly, they're not on time. Well, one of the problems is congestion itself. And so what we have found throughout the world is that if you can create free-flow conditions on highways, you have high-tech, clean buses, people will ride them. If you can go 65 miles an hour on a highway, you're more likely to take a bus. Nobody wants to sit on a bus any more than they want to sit in a car in traffic. So what we want to do is probe that even further and see if we can integrate this highway pricing concept with high-speed public transportation during peak periods. So those are the two main elements.

And then the other elements are to really get employers and states realizing that technology can be an enabling force to allow flex scheduling of workers. We have already seen that in the federal government. In fact, for those of us who commute on Fridays in Washington, D.C., we see the benefits of flex scheduling by the federal government. Very small percentages of federal employees taking what they call a regular day off, working 9 days out of 10, produces huge decreases in traffic. I just drove in on Friday the other day, free-flow conditions. The Thursday conditions were significantly worse. That is almost entirely as a result of the federal telecommuting policies, or flex scheduling policies.

A lot of employees love telecommuting. A lot of employers are nervous about it. What we've said is technology obviously can allow not only telecommuting, but basically staggered work schedules. And very small percentages of traffic removed during peak periods produces huge increases in traffic speeds. The numbers we have internally are about 5 to 8 percent reduction in traffic can reduce congestion by about 50 percent. So we are very close to solving most of the urban congestion problems.

And then, again, finally, real-time traffic. Not only do you need to provide more free-flow conditions, but you need to provide drivers and users of the system more information about how that system is performing. We have great information about virtually every area of our lives. In fact, we have information overload in many areas of our life. But we do have -- we are relatively ignorant about our transportation systems are performing on an hour-by-hour, minute-by-minute basis. Again, that's not a technology problem. The technology is widely available now to start doing that. It's really a political and policy problem to get that implemented.

So we announced these cities. New York City, I think it's safe to say, was the most comprehensive. Mayor Bloomberg announced that he was going to -- he's proposing basically what's called a "cordon toll," drawing a ring around the center of Manhattan, and he wants to charge people $8 a day to cross into the center of Manhattan. He's run travel numbers that basically shows significant reduction in congestion associated with that, that people will respond by either taking mass transit, traveling during different hours -- his proposal is 6:00 a.m. to 6:00 p.m., I believe are the times associated with is proposal -- or basically telecommuting or working from home through technology. And I think it's not clear exactly what each person would do, but what's clear is the shifts would be significant. They are now as we speak debating this exact concept in New York City. There's been a commission formed to decide on whether to proceed.

We have given them a deadline of the end of March to get legislative approval to do this. If they get legislative approval, they will get approximately $350 million of federal funds. If they don't, those funds will be reallocated to other cities willing to pursue similar demonstrations.

That's the most comprehensive, but it's also important to note that four other cities, as I mentioned: Seattle, San Francisco, Miami, and Minneapolis, are all pursuing I would say smaller concepts related to this concept of pricing and integrating transit policies. And we will see that play out over the next two years.

The theme of the initiative, just to be clear, was that we can solve congestion in the short-term. That this is not -- we don't need to have a 25-year capital plan to really start to reduce traffic congestion. And I think we are on the cusp of demonstrating that, and we're very excited about what each of these cities is doing.

Mr. Morales: Now, Tyler, using your New York example, the Mayor not only has called for the cordon pricing as a way of mitigating traffic congestion, but he also stated as part of a broader sustainability plan to create the first environmentally sustainable 21st century city. So to what extent is tackling traffic congestion not only good transportation policy, but also good environmental policy?

Mr. Duvall: That's a great question, Albert, and it's an era obviously where environmental considerations have become front-page news, as they should be. I think this is the great link that has been missing in the major public policy debates here in Washington and it is about to emerge. And I think Mayor Bloomberg was absolutely right to talk about the health benefits, the air quality benefits associated with reducing traffic. And it's not simply the idling vehicles, which obviously pollute more than vehicles running on more free-flow conditions, it's also the start-stop cycle associated with congestion. It produces more accidents and it also consumes significantly more fuel.

We've done some internal analysis at the Department about the fuel savings associated with some major pricing demonstrations, and I think in our view, you would save approximately the same amount of fuel that we will save under a major new fuel economy regulation that the Department put out for light trucks in 2006, that you would save approximately the same amount of fuel by simply doing congestion pricing in two to three major U.S. cities. So enormous fuel being wasted in congestion. And obviously, the fuel waste correlates extensively to greenhouse gas emissions, to the emissions of traditional pollutants.

So what we have found, interestingly enough, is that the environmental community has been one of our biggest proponents. We've got the environmental defense organizations, we've got the Sierra Club, major other environmental organizations are looking at the inefficiency of transportation systems as a great mechanism to reduce greenhouse gas emissions. I think that traditionally we've looked at the fuels themselves and the vehicles, but this is kind of the third prong of the environmental test. And we are very supportive obviously of telling the world about the environmental benefits of this concept.

Mr. Morales: That's fantastic, because clearly, there is a linkage there.

What does the future hold for U.S. transportation policy? We will ask Tyler Duvall, Assistant Secretary, Transportation Policy, at the U.S. Department of Transportation, to share with us when the conversation about management continues on The Business of Government Hour.

(Intermission)

Mr. Morales: Welcome back to The Business of Government Hour. I'm your host, Albert Morales, and this morning's conversation is with Tyler Duvall, Assistant Secretary for Transportation Policy at the U.S. Department of Transportation.

Also joining us in our conversation from IBM is Pete Boyer.

Tyler, I'd like to transition now and look towards the future. The U.S. Department of Transportation has been the world's largest investor and regulator of highway infrastructure, bearing almost 50 percent of the capital costs for U.S. highway investments. Now, going forward, what trends will have the most impact on U.S. transportation policy in, let's say, the next three to five years? And how will the DOT need to adapt to some of these changes?

Mr. Duvall: Great question. I think the single most important thing is state and local governments' willingness to try different approaches, and recognizing that previous approaches, previous financial policies, previous delivery mechanisms for projects really need to be rethought at a fundamental level. And what we are seeing across the country is I would say this groundswell of support from political leaders to do exactly that. It's going to take some time, a number of years. But transportation, particularly surface transportation policy -- and I would draw a significant distinction between service and aviation in this area -- surface transportation policy is going to be reformed only through state and local efforts and willingness. The federal government's role, in our view, should be to accommodate those people, to embrace creative people at the state and local level, and to really give them whatever resources and support they need to implement different approaches.

So the Secretary, Mary Peters, has spent extensive amount of time with governors, with state transportation leaders, with cities' mayors, and others to really impress upon them that we are here willing and able to help them, but that the federal government -- frankly, it's not appropriate that we would intervene extensively into a local decision-making matter, but that we are there with tools and resources available to help them.

On aviation it's, I'd say, a dramatically different story. You've got the federal government, which owns and operates the nation's airspace. The air traffic control system is operated by the FAA. You've got major federal investment into airports. I think there, federal policy ultimately needs to drive reform. And I think what we've said through a major piece of legislation that we've submitted to Congress is that the way we pay for aviation, primarily through ticket taxes and other mechanisms that have nothing to do with the costs in providing air traffic services, needs to be overhauled; and that we need to pay for air traffic services just like we pay for all of our other public utilities, which is directly. And so we've said user fees directly should be put in place and that these other indirect tax mechanisms should go away.

That proposal is pending before the U.S. Congress. The purpose of it is not only to drive short-term efficient behavior in the system, but also then to graduate from a ground-based radar system for managing air traffic control to a satellite-based system. So it's called Next Generation Air Traffic. That also is technologically doable, but again, if the financial and policy framework is not right, the United States will find itself lagging behind other countries who've developed new technologies for managing air traffic for many, many years. So again, very different policy issues in aviation and surface transportation.

And then I guess finally, maritime. The U.S. Department of Transportation's role in the maritime sector is quite different than it is in aviation and surface transportation. We are more promotional in nature. We do not fund major seaport activities. We do not regulate most of those activities. The Homeland Security Department is probably the lead agency in terms of grants and other regulations affecting seaports.

So what we have said is that the maritime sector generally can be a great reliever of surface transportation congestion. You've got huge amounts of capacity on our waterways that could be used more effectively. We've worked directly with port authorities to try to encourage that. But that, too, will require different infrastructure. And the types of ships that would move cargo up and down the East Coast, for instance, are very different than what you see now, which are major, extremely large ships coming in from Asia and Europe to access these ports.

So again, we are at the beginning stages I think of an infrastructure revival in the United States, a very different future for us. And it's a very exciting one, but it's also one that's going to require us to recognize that current approaches are not working very well.

Mr. Boyer: In a similar vein, would you tell us more about the National Surface Transportation Infrastructure Financing Commission? What's its mission and charge?

Mr. Duvall: There are actually two different commissions that have been formed. One is the Infrastructure Financing Commission, and the other is what's called the Policy and Revenue Commission. These are two commissions that Congress formed in the most recent federal transportation legislation that is designed to do exactly what I talked about: look at fundamentally new approaches; try to solve the financial problem that is emerging in transportation.

The Highway Trust Fund, which provides funding for approximately $50 billion a year of investments into highways and public transportation in the U.S., is projected to go into deficit in 2009 for the first time. So there is a tremendous urgency at the federal level to figure out what are the tax mechanisms to finance federal investment into transportation in the future. And so this commission and the Policy and Revenue Commission are charged with basically coming up with recommendations to the Congress and to the administration and the next president with ideas about how this system should work in the future.

We have relied entirely on a federal gas tax and diesel tax. I would say a 90 percent reliance on those two taxes over the last 30 to 40 years. And I think what's clear is the time has come to really fundamentally reassess whether those taxes are providing, one, the amount of capital needed to invest in the system; but two, the right performance incentives for users of the system.

Mr. Boyer: Now, given your perspective, Tyler, what emerging technologies hold the most promise for improving U.S. transportation infrastructure and operations for the 21st century?

Mr. Duvall: I think in terms of national system changes, I think this move from a ground-based air traffic system to a satellite-based air traffic control system as an idea holds the single largest potential to transform the way we move in the United States. It would be a doubling or a tripling of air traffic capacity to basically move to this model. I'm not a technology expert in this area, but from what I understand, it would significantly expand our ability to manage airplanes in closer proximity. We obviously now, for safety reasons, have to control airplanes to certain distances. This new technology would allow complete awareness about where every airplane is at all times, what their relative distances are, and is something that I think that FAA is working aggressively on.

The problem, again, is how do you pay for it and how do you deploy the technologies in a business way? I think we have tried extensively to move the FAA towards a business model, to recognize that they are the manager of a massive amount of technologies right now, and to really get a business mindset similar to what you've seen with some major companies in the U.S. to how they manage and deploy technologies.

On the surface side, again, I think the technologies really for system management are the ones I mentioned previously about real-time traffic, electronic charging. Those hold enormous potential to change the way we interact with the system.

And I think really part of it is just getting people to understand, to imagine. And I think the Secretary, Mary Peters, has used this expression -- this failure of imagination that we have in transportation. We have a history of thinking of transportation as kind of a -- you know, we lay down the highway, we build it, we engineer it, we design it, and then we kind of move on to the next project. And I think what is clearly changing is we need to bring forward a culture of systems management, the same culture that you see all the other major U.S. networks using today, managing more efficiently, expanding capacity within the existing framework. I think we just have got to get a lot more creative about how we deploy technologies, and recognizing that technology can supply huge increases in efficiency with relatively little cost.

Mr. Morales: Now, Tyler, this transformation, or revival to use your words, creates new competitive areas, and must create a huge demand for new competencies. So to that end, what steps are being taken to attract and maintain a high quality technical and professional workforce at the DOT?

Mr. Duvall: Great question. It's something that we have focused on. This Secretary, the previous Secretary, the Inspector General of the Department has really looked at whether the Department's core competencies are the right ones for the future. And I think it's safe to say that we're going to need to change in the future to respond to this. We have really worked hard to develop financial expertise. As we move I think increasingly from what I would call a pay-as-you-go model for infrastructure financing in which you collect a lot of tax revenues and then once you get enough revenues, you start and build the project, to the way that every major U.S. corporation finances capital investments, which is through capital markets, through borrowing, and obviously through equity contributions. We are going to need to really develop different financial expertise. The state departments of transportation themselves I think are going to have to invest heavily in acquiring new financial expertise.

And then, as you said, the technology itself requires people who have different backgrounds, not only civil engineers. We need to attract a lot of people in the technology sector that are currently not thinking about transportation as kind of a cool future. If you go to a kind of a telecommunications conference, you'll see the best and brightest from the major universities, MIT graduates. Unfortunately, transportation conferences, you don't see that yet, and I think that's coming. I mean, it's just a matter of time.

One of the reasons that the Department and the Congress created this new organization called the Research and Innovative Technology Administration is precisely to do that, to put an emphasis on technology and research also. And also what we're researching I think needs to change in the future.

So the pool of human capital the Department needs to attract is going to change in future years. Organizationally, we're looking at that as we speak. And I think our hiring practices, certainly in my office, are reflecting this need for different skill sets in the future.

Mr. Morales: Now, Tyler, you've only been with the federal government now for a relatively short period of time. But clearly, you are very energized around the work that you do. So I'm curious, what advice would you give to someone who perhaps is thinking about a career in public service?

Mr. Duvall: My first advice would be to do it. I really have just loved my time in government. I grew up in the Washington, D.C., area. I was exposed to government in various ways. Obviously a rabid reader of Washington newspapers and observer of government. And I never really fully appreciated, though, what government's role was, why government was doing what it was doing, the complex interaction between Congress and the Executive Branch, and I just think it's a tremendous experience. Anybody who can spend some period of time in government I think will gain an entirely different appreciation for how the world works.

Obviously, the business sector, too. I think those -- you know, significant experience with the business sector and significant experience with the government I think are two essential things to anybody who wants to succeed in the United States.

The federal government's role also with state and local governments is an area that I did not fully appreciate. The federal government is driving enormous amounts of state and local policy even as it does not own and operate or manage directly a lot of the systems obviously of state and local administrations. So it's a fascinating area. I think the federal government obviously has a lot of problems with it, but there are a lot of extremely good people who are as dedicated as any I've ever been around. And I think it's an experience that anybody who has any desire to have a broad-based understanding of the way the world works should do.

Mr. Morales: That's fantastic.

Unfortunately, Tyler, we have reached the end of our time. I want to thank you for fitting us into your busy schedule. But more importantly, Pete and I would like to thank you for your entry into federal government and your dedicated service to our country.

Mr. Duvall: Thanks, Albert. Yes, and one thing I definitely wanted to mention was that our website, fightgridlocknow.gov, is now up and running, and we're going to try to maintain that on an ongoing basis, in which we provide all the information about the various activities we're doing with respect to congestion. We'd really like to stimulate a lot more public engagement on this and to really start to change this mindset that congestion is not a solvable problem. That they broadcast traffic and weather together, weather may be a somewhat unsolvable problem, but we think traffic is a very solvable one.

Mr. Morales: Great, thanks.

This has been The Business of Government Hour, featuring a conversation with Tyler Duvall, Assistant Secretary, Transportation Policy, at the U.S. Department of Transportation.

My co-host has been Pete Boyer, director of federal civilian programs at IBM.

As you enjoy the rest of your day, please take time to remember the men and women of our armed and civil services abroad who can't hear this morning's show on how we're improving their government, but who deserve our unconditional respect and support.

For The Business of Government Hour, I'm Albert Morales. Thank you for listening.

This has been The Business of Government Hour. Be sure to join us every Saturday at 9:00 a.m., and visit us on the web at businessofgovernment.org. There, you can learn more about our program, and get a transcript of today's conversation.

Until next week, it's businessofgovernment.org.