States and investors approach contract negotiations with different goals. Whilst it is in their mutual interest to balance conflicting priorities to achieve the efficient and mutually-profitable exploration and production of extractives resources, the reality of the negotiation process is rarely this straightforward.
Firstly, there is often deep information asymmetry between the two parties in the negotiation; governments tend to have access to less information on projects than the investors with whom they are contracting, making them vulnerable in the negotiation process. Secondly, both states and companies are responsible to a broad group of stakeholders in the extractives sector and therefore the scope of negotiations will often not only cover financial and operational issues relating to the project in question, but also aspects of socio-economic development and environmental protection, in line with states’ commitment to sustainable development goals. Hence, an already complex negotiation process is made more difficult due to intensified expectations of what can and should be achieved from natural resource development. Thirdly, negotiations in this context require greater capabilities and systems from both parties to interpret and analyse the implications of negotiations. They also require an element of capacity building in local communities and civil society, as local interests now have a far greater impact on resource development decisions. The community development topic provides more information in this area.