We may actually discover it’s cheaper or smarter to limit the scope of what self driving cars have to do by limiting their infrastructure. If cities become more pedestrian (cyclist, public transport) centric then some of the issues disappear. It would be a hell of a lot easier if you eliminate the complexities of navigating city traffic if most of it is gone or car traffic is completely separated from the rest. Either via a reduced number of tunnels, suspended roadway, or simply by reducing the number of places where cars and pedestrians cross paths.

Between vastly reducing car traffic and separating it from pedestrians the problem of fully self driving is greatly simplified (probably not eliminated).

Where will existing cities find the budget and physical space for separating transportation modes?

If you do it in the correct order, first massively reducing car traffic and then separating it, the costs should be manageable over time. The point isn’t to do it all at once or overnight. This has the “side” effect of making cities a lot more human friendly even before doing anything to separate traffic while still reducing the complexity of navigating the city FSD.

Re-purposing one of the existing lanes (a bus lane can move more people than 3 SOV lanes combined). Toll roads, reinvesting parking revenue, and increased tax revenue from downtown land used for working, living, and playing instead of just storing automobiles.

Which proves the point the volkswagen guy was trying to make I guess.