Scottish Water was created in 2002

Auditor General Robert Black said the body had improved efficiency and performance since its creation in 2002.

He said water quality was improving and operating costs had been reduced.

But Mr Black said Scotland still lagged behind England and Wales for customer performance and described the timetable for investment as "challenging".

The �1.8bn programme of work is due to be completed by April next year.

Scottish Water has made significant improvements in its efficiency and performance but there is scope for more Robert Black Auditor General

Spending watchdog Audit Scotland said it would carry out a separate study of this issue.

Mr Black said Scottish Water had met most of its customer performance targets.

However, the industry regulator recently reported that the organisation fell short of the performance achieved by water companies south of the border.

Mr Black said: "Scottish Water has made significant improvements in its efficiency and performance but there is scope for more.

'Significant challenges'

"A robust regulatory regime is appropriate for Scottish Water, which is a public sector monopoly.

"It is important that the new Water Industry Commission sets challenging but achievable performance targets that will provide a full picture of Scottish Water's performance in future years."

Scottish Water's chief executive, Jon Hargreaves, said: "Much has been done in the first three-and-a-half years but much remains to be achieved.

"This report confirms the progress we have made and recognises that we still face significant challenges."

However, Tory enterprise spokesman Murdo Fraser said Scottish Water was a nationalised monopoly that mis-allocated resources.

'Under-resourced'

"It may well have improved its efficiency by adopting some commercial practices but that does not mean it is anywhere near as efficient as it should be," he said.

"Scottish Water needs to be taken out of public ownership altogether to give it a much-needed boost."

Businesses working in the construction industry said development was being held back due to poor sewerage.

Ken Ross, chief executive of Elphinstone Construction, said the problems were due to the constraints imposed on Scottish Water by the Scottish Executive and the regulator.

"Scottish Water are under-resourced," he said.