The group said it was now reviewing its investment in Siba, a 50:50 venture formed two years ago with the Milan-based contracting group Emit, to bid for local water and sewerage franchises.
South West said that because of public spending cuts in Italy - the result of the Italian government's attempts to qualify for economic and monetary union - the joint venture company had not progressed as hoped, picking up only two contracts, one of which was embroiled in funding problems.
A decision on whether to withdraw from the venture is expected in the next two months. South West lost pounds 300,000 in the first half of the year on Siba and would have to write-off pounds 1.1m of direct investment and a further pounds 6m of goodwill if it withdraws altogether.
News of the setback came as South West announced unchanged profits of pounds 68m for the first half, an 8 per cent increase in the interim dividend and forecast that water restrictions were unlikely next summer because of its investment programme to improve supplies. Its reservoirs are 63 per cent full compared with 50 per cent this time last year. After paying a windfall tax of pounds 104m, South West reported an after-tax loss of pounds 40m.
The company also confirmed that it is paying pounds 450,000 to take a 50 per cent stake in Enviro-Logic, an independent consultancy with applications to develop 29 water supply schemes around the country.
Ken Harvey, the chairman who is still looking for a chief executive to hand over responsibilities to, described the investment as an important development which South West intended to pursue with vigour.Reuse content