The SNP has resisted calls for Scottish Water to be privatised.

Despite pressure to consider privatising the company, the new SNP executive has ruled it out.

The Water Industry Commission for Scotland, monitors Scottish Water's financial, investment and customer service performance.

Its report also revealed private sector interest Scotland's commerical market.

Utility group Scottish and Southern Energy (SSE) wants to become the first private sector firm to supply water nationally to business and commercial customers next year.

The commission is concerned both at this slow start and at the future prospects for financing it from public funds. Sir Ian Byatt

Despite the concerns raised by the watchdog, water customers in Scotland have enjoyed relatively low prices compared with those south of the border.

The report said that under the price limits it set in November 2005, household customers have seen their bills rise by 3% - less than the rate of inflation and compared with 7% in England.

Businesses and other non-household customers, such as hospitals and schools, have had increases held to 2%.

Constraints which have dogged housing developers over a lack of water provision in recent years have also eased.

Mutual company

But Sir Ian Byatt, chairman of the commission, said in the foreword to the report that leakage problems remained too high and the large capital programme for the years 2006 to 2010 has got off to a slow start.

He said: "The commission is concerned both at this slow start and at the future prospects for financing it from public funds.

"Are ministers prepared to guarantee that some �200m a year will be forthcoming from the public purse for a long-term capital programme, or are they ready to see direct borrowing from capital markets?"

The new SNP government has already said it will not turn Scottish Water into a mutual company.

The report also found that although customer service was not as good in Scotland as in England, the service had seen improvements over the past year.

Sir Ian said the SSE application for a licence to cater for the retail business market was indicative of the "considerable interest" shown in Scotland's water services by the private sector.

He added: "We are encouraged by the interest of potential new entrants into the market.

"Competition will lead to greater innovation and lower costs to customers."

It means non-householder customers will be able to choose the supplier that best meets their needs, although the report said Scottish Water's household customers would also benefit.

The commission has already started work on its next price review, which will see prices for 2010-14 set.