THE SCOTTISH Government has promised to review the planning process in its new legislative programme. But perhaps it is missing a trick.

Most people think of Scotland as somewhere where property is largely in private hands. Secure private property rights are considered to be one of the lynchpins of a free society. Only by being able to own things do we husband them and create wealth.

But it’s not as simple as that. Property rights actually exist at several different levels. When you buy something in the shop, it’s yours, right? Well, unless government imposes restrictions on its use, as with a gun or a car. In which case, in a way, it’s partly theirs too.

Something similar is true with landed property. Most of it is owned privately. But the rights to develop property are almost exclusively not privately owned. They were nationalised after the war, and now if you own land you cannot change its use or look without the permission of the state.

Such ‘development rights’ are extremely valuable assets. Land on its own is almost worthless. It is the right to develop it that gives it its value, and this right is now owned by government.

You can see why. Developing land affects other people, not just the ‘landowner’. With the industrial revolution the demand for lucrative but ugly development soared. As the value of land went up, unpredictable industrial and residential development threatened to ruin our landscape.

The state stepped in as an arbiter of two competing forces: the material requirement for development and the desire to preserve the beauty and amenity of our environment.

The trouble is that the state, as ever when it allocates resources, is dreadful at it. Just as a soviet factory had no idea how many shoes to make and no incentive to make them well, so the planning system has no idea where development should happen or incentives towards high quality.

The system has evolved mechanisms to help its guesswork. Local authorities are invited to come up with gosplan type predictions of where they think demand for housing and commerce will occur. Then a quasi-judicial process takes place in which developers lobby officials to allow their project and concerned residents and environmentalists counter-lobby to prevent it. The result is winner-takes-all with development often badly designed, in the wrong place, and the windfall benefits accruing to whichever side won.

Take this example to illustrate the point. A farmer owns an acre of land. It’s designated by the state as agricultural, and as such is worth £5,000. A building firm offers the farmer to buy his land for development. The builder knows that the four houses he can build will be worth £300,000 each and will cost about £250,000 to build. He needs a return on capital of 10%, or about £100,000 on the whole project. That implies the development value of the land – the ‘uplift’ from getting planning permission over and above its agricultural value – is worth some £80,000.

This £80,000 is in effect the environmental cost of the development as judged by the planning process. For of course the difference in values between agricultural and residential land is a result of the shortage of the latter caused by the planning restrictions designed to preserve the landscape. As it is, the £80,000 is almost certainly wrong either way, a product of a bureaucratic exercise in economic guesswork.

What is worse, though, is what happens to the eighty grand. Either the development is turned down, in which case the cost of houses elsewhere rises. Or the developer wins, and the £80,000 windfall is split between the builder and the farmer.

Meanwhile the next door neighbours see the collective value of their properties fall by £50,000. They are understandably embittered. The rest of the environmental cost is dissipated among anyone who might have enjoyed the scenery now blighted by the development.

The planning system in Scotland has never worked well, as is witnessed by the often dreadful quality of architecture and development since the war. But now it is creaking more than ever under the twin pressures of unaffordable housing and increased environmental consciousness. The fraught issue of wind farms illustrates how difficult it is for the process to get the balance right.

A much better system would be for developers to buy or lease development rights from local people. In other words the government would hand back this tier of property rights, not to individual landowners, but to the people more generally affected by development in their area.

A whole slew of positive incentives would arise. Developers would improve the quality and look of their buildings to minimise the fees charged by locals. Development would also naturally be slanted towards areas that were less environmentally sensitive. Local residents, for their part, would be encouraged to allow or even attract development. In other words, so long as the commercial value of development outweighed the costs of its environmental impact, it would go ahead. The value of environmental beauty and amenity would thus be crystallised, allowing a proper judgement of the competing merits of development and conservation. As ever, the price mechanism would allow a far more efficient allocation of resources.

Encouragingly, precedents already exist for such arrangements. We just need to make the leap from confrontational to contractual planning. For example, housing developers already make ‘developer contributions’ and wind farm companies establish ‘community funds’, both implicitly in compensation for the damage they do.

The trouble is it goes to the wrong people. To take the example above, the developer pays, say, £60,000 for the rights, but this money goes towards a play park that local residents rarely use or the local council’s social housing programme. The people affected barely benefit. As a result these payments are regarded with suspicion – as if the developer is ‘bribing’ the authorities to smooth its plans.

We need to see planning rights instead for what they are: a form of property rights that are assets owned by local people. As such they can be bought and sold or rented just like other property rights.

Tradable property rights work well in theory. In practice all sorts or difficulties remain, for example who exactly should own the rights, within which areas, and how they should be organised. The Scottish Government should use its new legislation to explore and expand on the concept, perhaps by piloting a scheme in selected rural areas.