Business Stream, the trading arm of Scottish Water, has lost a huge Scottish public sector contract to a company based in England.

Anglian Water Business will now serve Scotland’s schools, hospitals and other public buildings in a deal which the Scottish government says will save £40 million a year.

The government said AWB was the most competitive bidder for the £360 million contract. It will manage the account from its Edinburgh office and promises to create jobs and protect others through the transfer of staff.

Business Stream chief executive Johanna Dow (pictured) said was “very disappointed” and said that despite the decision many public sector agencies have said they will stay loyal to Business Stream.

“We are very disappointed by the outcome, having lost by the narrowest of margins,” she said.

“We have a proven track record of delivering excellent results working in partnership with Scotland’s public sector over the past seven years, with savings of more than £36 million delivered over the term of the existing contract.

“It’s worth noting that this is a framework and regardless of the decision, several public sector agencies have already indicated their preference to remain customers of Business Stream. Our experience of working with public sector organisations in Scotland provides us with a deep understanding of the sector and we are confident that we can continue to help organisations to achieve their challenging financial targets.

“Our focus is firmly on the future. We remain the leading supplier in Scotland, and we’ll be looking to build on that position whilst acquiring more customers in England, ahead of the market opening up to competition in 2017.

“By continuing to offer innovative services and maintaining high standards of customer service and competitive pricing, Business Stream is ideally placed to take advantage of these opportunities.”

The government said Scottish Water will continue to provide the water for the 96.5% of Scotland’s population it currently supplies.

It said AWB’s bid offered immediate savings of £5m a year compared to the nearest bid, and water efficiency support to reduce customers’ water consumption.

As well as helping the environment, it said these ‘green’ measures could reduce bills by a further £5m a year, meaning the contract will save public bodies up to £40m over the next four years.

Cabinet Secretary for Infrastructure, Investment and Cities Keith Brown said: “This is the best deal for Scotland under the rules that bind us, and this contract will save public bodies up to £10m annually for the initial three year period of the contract with the option to extend for a further 12 months.

“Legislation introduced by a previous administration to safeguard the public status of Scottish Water requires us to tender out these services.

“But we have ensured that Scottish Water remains in public hands, and we have secured the best possible deal to ensure Scotland benefits.

“New staff are being recruited in Scotland to manage the new contract and we have secured a Living Wage guarantee. In addition, AWB will more than double their Edinburgh workforce, as well as planning for new apprenticeships and trainees.

“AWB will also work with public bodies to reduce their impact on the environment and reduce their water consumption.

“But the biggest benefit of all will be the money that can be ploughed back into the services provided by those buildings – the schools, hospitals and public offices – throughout Scotland.”

The existing contract with Scottish Water subsidiary Business Stream was due to expire on 31 March.

AWB emerged with the most attractive bid but an extension was put in place to allow all of the bidders to consider initial feedback and provide on-going service to public bodies.

The current contract will be continued until 31 December to allow for a seamless transition to the new management.