Decoding demand studies: Key questions for toll roads, logistics parks & solar mini-grids

Complete decision useful market analysis —Create better informed project designs.

You have completed your project screening and prefeasibility.

Decided to further develop the project.

The next stage is early-stage development, the second of the five stages of project development.

In this stage, there is a logical order in which to execute.

Some steps must precede some others.

You cannot complete your technical design, environmental studies, or definition of key commercial terms in contracts before completing detailed market demand and analysis.

It is obvious, I know.

But it bears reiterating, because you may be tempted to speed things up, and ask your advisors and your team to do this.

Resist that temptation.

I once led coordination on a project development for a toll road, where the lead representatives of the project sponsors were trying to move things along quickly.

They insisted that we attempt to use the desktop analysis as base input to the project design and project ESIA even before we completed the detailed traffic studies and willingness to pay.

They saw it as purely confirmatory.

We were made to go ahead despite the project advisory consultants and I sharing our misgivings.

The budget for detailed design had been used up by the time the traffic count was eventually completed.

The dimensions the prefeasibility had suggested were significantly different after the detailed traffic count, but the budget was already used up.

The time we were trying to save ended up being spent anyway on redoing the design.

We also wasted money.

Information dependency and project quality demands this order of execution

• First: Detailed Market analysis and demand studies

• Second: Project Technical design

• Third: Environmental Social and Impact studies.

If you want to gain speed, consider these

1. Regulatory assessments (if needed) could happen in parallel with detailed demand studies.

2. Drafting/update of necessary documents (contracts, land title, leases), CAPEX estimation, and financial modelling could happen in parallel with ESIAs.

If demand studies are that important, what makes them effective and decision useful?

They do the following:

• Provide data-backed assessment of the potential market size and its growth trajectory.

• Clearly articulating the total market demand your project addresses and what slice of that demand it can serve or obtain.

• Provide profiles of target customers and their specific needs.

• Give forecasts based on sound methodologies.

• Provide price or tariff estimation - necessary input to project's financial viability and return estimation.

Best Practices for Effective Market Assessment

• Employ a Disciplined and Systematic Approach: Follow a structured methodology for conducting your market assessment, ensuring that all key aspects are thoroughly investigated.

• Utilize a Combination of Research Methods: Integrate desk research with primary data collection through surveys, interviews, focus groups, and modelling to gain a comprehensive understanding of the market.

• Engage Independent and Objective Experts: Engage independent, credible market research consultants or industry experts to either unearth completely or at least validate your findings and provide objective domain insights.

• Develop Realistic and Well-Justified Forecasts: Ensure that your demand forecasts are supported by clear evidence, realistic assumptions and sound logic.

• Conduct Thorough Sensitivity Analysis: Assess how changes in key assumptions (e.g., traffic volumes, energy prices) could impact or be impacted by pricing

• Captures input from other stakeholders: Beyond direct offtakers or end users, these studies also need to show engagement with local communities, government agencies, and potential investors throughout the market assessment process.

• Develop a Compelling Project Narrative: Clearly articulate the problem your project is solving, the value it will create, and its potential for financial sustainability.

• Focus on Long-Term Value Creation: Emphasize the long-term economic, social, and environmental benefits of your project.

• Learn from Past Experiences: Study successful and unsuccessful infrastructure projects in the region to identify best practices and lessons learned.

• Engage with local communities and seek meaningful partnerships: Foster collaboration, address local needs, and ensure community buy-in.

• Properly and meticulously documented: A well-prepared feasibility study exists and provides details to key questions about the market. it is evidence-based, it provides details on methodology and approach, and its clear findings.

Here are key considerations and questions to try to answer in the market assessment and demand analysis. Best explained with application infrastructure sectors:

Example 1: Toll Roads

Identification of Target Market

• What is the strategic importance of the proposed route?

• What are the key population and socio-economic data of the area the road will serve? Consider population density, employment rates, and income levels.

• What is the current road network, including the current geometry and road condition?

• Are there any planned road upgrades and land use planning in the area that could influence traffic patterns?

• What are the possible alternative roads where traffic can divert to in order to bypass the toll plazas?

• What is the status of implementation of any current road plans?

• What existing technical data concerning the road and land is available, such as topographical maps and surveys?

Determining the size of demand

• What is the historic and current annual average daily traffic (AADT)?

• What is the historic and current annual average daily truck traffic (AADTT) data?

• What is the current traffic composition (e.g., cars, trucks, motorcycles)?

• What are the origin-destination (OD) data for traffic in the corridor?

• What are the current load information and travel times on existing routes?

• What are the macro trends, population dynamics, and migration patterns in the area and surrounding regions that might influence travel demand?

• What are the current and projected traffic patterns and growth rates for light and heavy vehicles? This should consider historic trends and potentially a limited econometric analysis for upper and lower limits.

• What is the current and future capacity of the proposed toll road (single vs dual carriageway) and its potential levels of saturation?

Classify and describe your customers

• What are the different vehicle classes that will use the road (e.g., motorcycles, light vehicles, minibus taxis, heavy vehicles separated by axles)?

• What are the likely travel purposes of potential users (e.g., commuting, business travel, freight transport)?

• What are the key socio-economic characteristics of the road users that might influence their travel behaviour and willingness to pay?

• Are there specific industries or businesses that heavily rely on transportation in the region?

Volume or Demand Mix

• What is the current AADT per vehicle class?

• What are the peak hour flows? What is the directional distribution during peak hours and the potential need for reversible lanes?

• Any seasonality in traffic and or traffic mix?

• What is the potential for traffic diversion to alternative roads based on toll tariffs and perceived benefits? Methods to calculate this include generic curves, logit curves, and current attraction rates on similar toll roads.

• What is the expected attracted traffic to the tolled road due to improved infrastructure?

• What are the varying scenarios of volume growth for the traffic - optimistic, realistic, and pessimistic projections?

Willingness and Ability to Pay

• What is the "willingness to pay" for using the toll road among different vehicle classes, as indicated by surveys?

• What is the current average tariff per kilometre charged on comparable toll roads in similar areas, where such toll roads exist?

• What are the government’s input and recommendations regarding toll fees and potential exemptions or discounts?

• What is the price sensitivity of demand that could influence projected revenues?

Impact of Complementary Infrastructure

• How will existing and planned road upgrades and the overall land use planning in the region affect traffic volumes and patterns?

• What is the intended connection to other significant developments, any other proposed development in the arearea that can benefit from the road if later built in future?

• What is the proximity of the toll road to other transportation infrastructure (e.g., railways, airports) and how might this influence demand?

Benchmarking pricing and revenue

• What are the potential tolling systems to consider (e.g., open vs closed)?

• What toll collection technologies should be evaluated (e.g., manual, electronic), considering traffic levels, hardware/software availability, supporting services (e.g., bank services), ease of operation, and auditability?

• What is the proposed tariff structure for the various vehicle classes, considering benchmarking, survey results, and client input?

• How will exemptions or discounts based on agreed business rules affect revenue?

• What are the different scenarios for forecast toll revenues, based on traffic projections and determined tariffs?

Example 2: Logistics Parks

Identification of Target Market

• What are the current and future economic, social, and business trends in the state and surrounding regions that might drive demand for an industrial park?

• Which specific industries and actual companies within or around the state are most likely to benefit from or even become anchors pulling and driving the demand for the project? Documenting their expressions of interest is important.

• What is the potential for the park to function as a free zone and attract companies involved in imports and exports compared to existing more established ports/inland cargo centres

• What is the intended catchment area/reach of possible customers served by the Industrial Park, considering the potential for current and future efficiencies of scale and co-location?

• Which value chain drivers, gaps, and constraints in key sectors could the facility address, unlocking opportunities?

• What are the key services envisioned for the park (e.g., light manufacturing, warehousing, cold storage, import/export clearance, truck stop services)?

Determining the size of demand

• What are the macro trends, population dynamics, migration patterns, and overall industrial and economic activity in the target area and neighbouring regions?

• What are the hubs of economic, residential, commercial, and industrial activity in the state and region?

• Which industries are emerging, expanding, or relocating into or out of the state and neighbouring areas, and what is the rationale for these movements (surveys with participants are useful)?

• What is the evolution of mining, agricultural, and industrial activities, with details on key minerals, crops, and products made in the region?

• What is the historic scale of sectoral activity within the area over the past 5 years (historic numbers or estimates)?

• What international, national, or state-level policies, laws, or emerging trends (e.g., AfCFTA) might impact the economic value obtainable in relevant sectors?

• What are the varying growth scenarios for key sectors in the region, estimating the potential business volume the park could support?

• What is the correlation of targeted sectors with GDP growth or other economic indicators?

Classify and describe your customers

• What are the likely industries and types of businesses that will be attracted to the park (e.g., manufacturing, trade, agribusiness, mineral extraction, international trade)?

• What scale of business do they handle? Are they large scale, Medium scale, or SMEs or cottage industry

• What are their potential needs in terms of infrastructure and services (e.g., power, water, warehousing, logistics services, customs clearance)?

• What are their potential requirements for connectivity and access to transportation networks (roads, rail, inland water)?

• What is the likely catchment area for both domestic and international activities?

Volume or Demand Mix

• What are the various scenarios of volume and business growth for the park over time (optimistic, realistic, pessimistic)?

• What is the estimated potential business volume supported by the zone from different key sectors?

• What is the potential demand for different types of services within the park (e.g., warehousing space, manufacturing plots, customs processing)?

• What is the anticipated mix of domestic versus international businesses?

Willingness and Ability to Pay

• What is the perceived benefit for companies choosing to locate in the industrial park or free zone compared to existing options?

• What specific service requirements would make the park a more attractive choice for potential users?

• What are the current costs of similar services in alternative locations (e.g., warehousing, cargo handling)?

• What are the potential cost savings or efficiency gains for businesses locating in the park?

Impact of Complementary Infrastructure

• What is the proximity of the proposed site(s) to existing hubs of economic activity, residential areas, and commercial centres?

• What is the status of existing supporting infrastructure at the proposed location(s) (e.g., power, water, access roads, telecommunications)?

• What is the potential viability of multimodal transportation alternatives (rail, inland water) to and from the park?

Benchmarking pricing and revenue

• What are the potential pricing models for land leases, service charges, and other fees within the park?

• What are the competitive pricing levels in similar industrial parks and free zones?

• What is the potential for revenue generation from different services offered within the park?

• What are the projected revenue streams based on different scenarios of occupancy and service utilisation?

Example 3: Solar – Mini Grid.

Identification of Target Market

• Is the area an underserved or unserved community in terms of electricity access?

• Proximity to the grid infrastructure?

• What are the existing economic activities in these potential markets? (e.g., agriculture, small businesses, residential)

• What is the strategic importance of the location? Are there government initiatives or development goals that align with providing electricity access to these areas?

Determining the size of demand

• What is the population of the targeted communities or areas?

• What is the current level of electricity access in these areas? What are the existing sources of power (if any) and their reliability?

• What are the socio-economic data of the population that might influence electricity demand and affordability?

• What are the historical and projected growth trends of the population and economic activities in the targeted areas?

• Are there any emerging or expanding industries within the region that could significantly increase electricity demand?

• Are there potential anchor loads and productive users within these areas, such as telecommunication towers, agricultural hubs of activity, mineral extraction?

• Are there any national or state-level policies or trends that might impact the demand for or viability of solar mini-grids (e.g., rural electrification targets, renewable energy incentives)?

Classify and describe your customers

• What are the different types of potential electricity consumers (e.g., households, small businesses, agricultural users, public institutions)?

• What are their typical daily and seasonal energy usage patterns?

• Are there opportunities to support or create productive or commercial use of electricity within these communities?

Volume or Demand Mix

• What are their specific energy needs and requirements (e.g., lighting, refrigeration, machinery, communication)?

• Are there any specific community needs or priorities that a solar mini-grid project could address (e.g., improved healthcare through reliable power for clinics, enhanced education through electricity for schools)?

• What is the estimated electricity demand from each category of potential customer? Residential, commercial, productive use?

• What is the anticipated peak demand for the mini-grid?

• Is there seasonality in energy demand? What is it driven by?

• What is the critical load, that batteries must be sized for?

• What is the load factor expected for different customer segments?

• Are there opportunities to supply power for value-added services beyond basic electricity (e.g., powering internet infrastructure, e-mobility charging)?

• How might the demand mix evolve over time as economic activities and population change?

Willingness and Ability to Pay

• What is the average income level of the potential customer base?

• What are their current energy expenditures and on what sources? Kerosene, diesel, petrol, wood/charcoal?

• What is the perceived benefit of having access to reliable and clean electricity?

• What are the price sensitivities of different customer segments to electricity tariffs?

• Are there opportunities for tiered pricing or subsidies to ensure affordability for lower-income households?

• What are the willingness to pay levels for different levels of service reliability and power quality?

• Are there potential partnerships with government or non-governmental organizations to provide grants or subsidies that could influence affordability?

Impact of Complementary Infrastructure

• What is the existing transportation infrastructure (roads, railways) and how does it facilitate or hinder access to the project site and customer areas?

• What is the availability of communication networks (mobile, internet) and how might they interact with or benefit from the solar mini-grid? Especially with vending, metering, and site monitoring?

• Are there plans for future infrastructure development in the area that could impact demand or project viability?

• How does the presence or absence of other power infrastructure (e.g., grid extension plans) affect the potential market for a mini-grid?

Benchmarking Pricing and Revenue

• What are the prevailing electricity tariffs in comparable areas or for similar consumers (if any)?

• Are there clear savings from transitioning to the energy plant?

• Are there other potential revenue streams beyond electricity sales (e.g., connection fees, fees for value-added services)?

• What are the potential impacts of different tariff levels on demand and then on revenue?

• What are the potential risks to revenue streams (e.g., non-payment, lower than expected demand)?

• How will metering technology and management (if applicable for any interconnected infrastructure or services) ensure efficient revenue safeguarding?

Bringing it all home

Commencing early-stage development requires a logical sequence that begins with estimating demand and potential, including what slice of that potential is likely accessible and how that potential could grow.

By addressing these key questions and considerations, a comprehensive analysis and demand forecast will lead to better-informed investment decisions and sustainable projects.

Robust Market Analysis and Demand Forecasts lay a strong foundation for future project development that will attract financing.

It supports the prediction of revenue, provides are vital inputs, project design and capex estimate, and running costs. All of which are necessary to estimate project value, funding needs, and viability.