Market study is conducted at different points in time during the project feasibility study stage (which includes technical feasibility, financial feasibility, value proposition of project and economic analysis) of project development process. It involves assessment of suitability of technology options, assessment of demand, user preferences in terms of tariffs, likely usage of project facilities, willingness to pay etc. The market study estimates the likely revenues that will accrue to the project over the project period. This is an important input for the economic and financial viability analysis and is critical when assessing the bankability and affordability of a project.

PROJECT

Gangavaram Port

The port has been developed as an all-weather, multipurpose, deep-water port with a depth of up to 21 metres, capable of handling Super Cape size vessels of up to 200,000 DWT.

The first round of bidding for this project was called for in 1996, under which two pre-qualified consortia submitted their bids. This round of bidding was cancelled for many reasons including non-preparation of a comprehensive feasibility study with realistic traffic projections. The contracting bidders had no reliable demand forecast on which to base their financial analysis of the project and submit a bid. This resulted in considerable loss of time and money to the Government.

The shortcomings of the first round were corrected by the Government during the second round of bidding. An independent consultant was appointed to prepare a comprehensive feasibility study and manage the tender process. The case is a good example of the importance of carrying out thorough demand analysis for a PPP project to be successful.

Source: http://toolkit.pppinindia.com/highways/module3-rocs-gp1.php?links=gp1

Demand estimation is crucial in estimating the financial feasibility of the project and it ultimately has a bearing on the structure of the project. Inaccurate demand forecasts have the following implications:

1. If actual demand is more than the estimate

• The private partner might earn more revenues than expected, leading to higher equity returns;

• Infrastructure capacity might be insufficient to absorb higher demand implying that the project sizing may need to be reviewed.

2. If actual demand is less than the estimate

• The private partner might earn less revenues than expected, which could impact service delivery;

• Tariffs might have to be increased to offset lower demand, which, in turn, would increase the burden on the consumer;

• If tariff increases do not lead to a financially sustainable situation or if tariff increases are unacceptable, the Government may have to step in and provide support or take over the project.

What can go wrong in demand analysis?

• In the Delhi-Gurgaon Expressway project, the bid process was carried out on the basis of an out dated traffic study. Thus, the actual traffic volume grossly exceeded the projections from the very beginning of operations.

• In the Vadodara-Halol Toll Road project, the traffic estimates were based on the assumption that the industrial incentives for the project area would continue. However, the incentives were withdrawn and traffic was almost 50% lower than projected.

Source: http://toolkit.pppinindia.com/ports/module3-rocs-intro.php?links=rocs1

Elasticity of Demand

• Price elasticity of demand (PED) is an elasticity used to show the responsiveness of the quantity demanded of a good or service to a change in its price. More precisely, it gives the percentage change in demand one might expect from a one per cent change in price.

• Price elasticity is almost always negative, although analysts tend to ignore the sign even though this can lead to ambiguity. Goods with a small PED (less than one) are said to be inelastic: changes in price do not significantly affect demand as, for instance, in the case of drinking water. Goods with large PEDs (greater than one) are said to be elastic: a slight change in price may cause a dramatic change in demand.

• Revenue is maximised when price is set so as to create a PED of exactly one. PEDs can also be used to predict the incidence of tax. Various research methods are used to calculate price elasticity including test markets, analysis of historical sales data and conjoint analysis.

• Quality is also an important element in the elasticity assessment - for example, the issue of interconnectivity in case of urban transport projects. No interconnectivity implies low quality, which implies low demand.