A new report has proposed changing Scottish Water to a private not-for-profit ownership model along the lines of Oxfam, Network Rail or Welsh water provider Glas Cymru.

It currently owes £2.75 billion to the Scottish Government, and the sell-off could raise this cash. Although it needs the cash, the Holyrood administration and the union are ideologically against such a move.

But the report, by the Independent Budget Review Group, backed by accountants KPMG, says the change in status could also add £750 million to the public coffers by increasing its debt levels to typical market levels for water companies.

Jenny Stewart, head of public sector at KPMG in Scotland, said, "It is a simple change of ownership from Scottish ministers to members representing the Scottish community on a not-for-profit distributing basis".

Glas Cymru, which owns Welsh Water/Dwr Cymru, is the only water company limited by guarantee at present. It has no shareholders to pay dividends to; instead, any financial surpluses are passed on to its customers.

Its assets and capital investment are financed by bonds and retained financial surpluses. The Glas Cymru business model aims to reduce Welsh Water's asset financing cost, the water industry's single biggest cost.

The report says: "The need to plan long-term investment, such as upgrading Glasgow's sewer network, will compete for Scottish Government capital funding against other priorities such as schools and roads. Scottish Water currently accounts for 5% of the Scottish Government capital budget but even at current levels of water investment, this will grow to 10% as capital budgets shrink."

Scottish Water's response is to argue that it has successfully turned the company around and receives no subsidy. Instead it borrows from the Scottish Government but the scale of this borrowing has been reduced from £200 million per year in 2006-2010, to £140 million per year in 2010-15.

The KPMG report argues that public budget cuts would increasingly mean that this £140m would be at the expense of essential public services. It says that both reducing water investment or increasing customer rates are not options.

The new company would borrow from private lenders in a similar way to Glas Cymru and repay at interest levels not much higher than current public borrowing and lower than other private borrowing models such as public-private partnerships (PPP).

"The Company would benefit from the stability of being able to plan infrastructure investment, and investment in more entrepreneurial activities, over longer periods and based on planned programme and business efficiency rather than being constrained by [the Government capital budget], the report says.

The report acknowledges that the Scottish and UK Governments would have to reach an agreement as to how the debt repayment was divided up, but said that customers would receive dividends in the form of reduced bills.

The report is of the opinion that mutualisation, suggested by the LibDems, is not an option because its debt-financing protocols are untested and it would be impractical to give every owner/customer a vote on corporate decisions.