SNP target water to raise £1bn
• Government ownership of Scottish Water set to end. Pic: PA
But under the new model - which stops short of outright privatisation - ownership would be transferred to a "public interest" board with powers to borrow money from banks rather than rely on taxpayer funding.
The proposal, recommended last week by an independent review on Scotland's budget, would free up the 140 million a year currently earmarked for the utility.
Ministers would also get back more than 1bn already given in loans to Scottish Water, helping them to pay for the new infrastructure projects such as the new 2bn Forth crossing and 500m Southern General Hospital in Glasgow.
Changing Scottish Water's ownership is unlikely to succeed without cross-party support at Holyrood. But Scotland on Sunday can also reveal that Scottish Labour, which has expressed its opposition to privatisation, is preparing to put the "public interest" model before its shadow cabinet soon.
The Independent Budget Review (IBR) last week warned that as many as 50,000 jobs would have to be axed in the public sector over the next four years to cope with what it described as the biggest crisis in public spending since the Second World War. One of the key areas under strain is Scotland's capital budget – which pays for infrastructure work.
The IBR showed that the Scottish Government has a 1bn hole in capital spending over the next three years. Scottish Water has been highlighted as one of the areas for savings because, as a publicly-owned company, it can borrow money only from the Scottish Government's capital funds. Ministers have agreed to lend it 140m a year until 2015 to continue much-needed improvements to the country's antiquated water supply and sewerage network.
First Minister Alex Salmond has categorically ruled out privatising the utility, but several senior SNP sources have now disclosed that this has not ruled out a change of ownership. The model under consideration would turn the utility into a company similar to Network Rail and Welsh Water.
As a registered listed company, it would be able to borrow funds on the open market, but would be held in trust by a board who would represent the public. Dividends would not be paid out but could instead be used in the form of rebates on water rates.
On top of that, the IBR estimated that the Scottish Government would get 1.2bn from the restructuring.
One senior SNP source said: "We are looking at not-for-profit models in other areas."
Another senior Scottish Government source added: "We are resolutely opposed to privatisation. But we're not in a position to say there won't be any change to Scottish Water."
That same view was supported by Labour. One senior Labour figure declared: "We are opposed to privatisation but there are some other options. The shadow cabinet will have to take a look at them and we need to take a hard look. The Welsh Water model is an interesting example."
However, any support for reform will be met with fierce resistance from within sections of both parties and from union chiefs who claim the 'public interest company' model is simply "privatisation by stealth". Such a move would leave it vulnerable to interference from private sector lenders as well as being a "halfway step" to full privatisation, they claim.
Along with 50,000 job cuts, the IBR said Holyrood also needed to review universal benefits such as free personal care for the elderly and free prescription charges. It also warned that Ministers may have to reconsider their opposition to universities charging tuition fees.
Last night, both the Conservatives and the Lib Dems said they would support the 'public interest company' model.
Scots Tory finance spokesman Derek Brownlee said: "It is inevitable. You can't say you are going to deal with the budget problem when you don't even have the guts to deal with Scottish Water."
Jeremy Purvis, the Lib Dem finance spokesman, said: "Scottish Water can be funded differently and still remain in public hands."
The accountancy firm KPMG estimates that Scottish Water could get access to around 3bn of external financing if it went down the "public interest" company route.
However, Gerry Crawley, Regional Organiser of Unison said: "Bodies like these are effectively controlled by the private financial institutions. They would insist their risk is minimised by transferring services and jobs to English and European private water companies. That is what is happening at Welsh Water."