Reservoirs have received significant investment

The company's annual report said that its regular spending has fallen by more than �100m.

But �1m is being invested in water and sewerage improvements each day, Scottish Water said.

Pay and bonus packages given to senior executives have risen, with chief executive Dr Jon Hargreaves seeing a rise of more than 10% to �203,000.

Scottish Water was formed by a merger of the country's three water bodies, and was intended to increase efficiency while keeping the industry within the public sector.

Chairman Alan Alexander said: "These accounts highlight impressive savings, increased efficiency, better service to customers and good progress on the start of work that will rebuild the infrastructure after decades of neglect.

"Scottish Water is proving that the public sector model is working and delivering for the people of Scotland."

There is no room for complacency and the Scottish Executive expects Scottish Water to meet all the targets that have been set Ross Finnie Environment Minister

The annual report shows that the company's seven senior directors received a combined increase of �130,000 in their salary, bonus and benefits packages.

A company spokesman said the directors' wages reflected their achievements and they remained the lowest of all the water companies in the UK.

He said: "Scottish Water is required to pay salaries that will attract and retain the right people to deliver the transformation of the water industry at an unprecedented pace.

"They are paid for delivering significant improvements in a relatively short space of time and changes which have saved �1m of customers' money every week."

The company has highlighted the fact that, thanks to the investment of the past two years, Scottish beaches are at their cleanest since testing began.

Environment Minister Ross Finnie has welcomed the trends highlighted in the report.

Scottish Water says the quality of tap water is improving

He said: "The accounts confirm the slower than hoped for level of capital investment but I'm encouraged that the Scottish Water Solutions partnership is showing real signs of tackling the problems and I expect to see the pace of investment pick up over the next two years.

"Scottish Water is making real progress in dealing with its inheritance of substantial operating inefficiencies and massive under-investment.

"There is no room for complacency and the Scottish Executive expects Scottish Water to meet all the targets that have been set."

Scottish Water has claimed that, in spite of having to raise money for further investment, bills here represent good value compared with charges levied by the privatised companies in England and Wales.

It said that four of the private companies are responsible for higher bills than those faced by households in Scotland.

Scottish Water said it has also introduced a new low user tariff for small business customers.

Private sector

The Scottish Conservatives have disputed the claim that Scottish Water is proving to be a public sector success story.

Environment spokesman Alec Johnstone said: "The efficiencies Scottish Water claim in their annual report are almost entirely in the areas where they have been able to bend the rules in order to emulate the actions of the private sector south of the border.

"Scottish Water Solutions is a private sector tie-up delivering infrastructure using the expertise of private utility companies utilising private finance in many cases."

The Scottish National Party has criticised the level of bonuses being paid to senior staff in the company, and questioned whether their performance had justified the payments.

SNP environment spokeswoman Roseanna Cunningham said: "In the last two years, the directors of Scottish Water have laid off more than 1,000 staff.

"At the same time, communities across Scotland have seen development plans vetoed by Scottish Water because they can't provide basic water and sewage services.