Law makers and political advisers urged the government to compensate residents of areas in southern China where water is being diverted to the north.

"People in the water source regions have contributed greatly to water resource preservation by shutting down a large number of factories," said Huang Wei, a law maker from Ankang City in Shaanxi Province, a major water supplier for China's mammoth south-to-north water diversion project.

The project, designed to send water from China's longest river, the Yangtze, to the north, is scheduled to begin supplying water to Beijing in 2008, to help alleviate a water shortage in the arid northern city.

To ensure the water quality, localities along the routes have to close their polluting factories and turn to environmentally friendly projects.

This has created a financial burden for local governments.

In Ankang City alone, 16 companies that produced huge profits but were also heavy polluters have been shut down. As a result, the city's industrial output value was cut by more than 300 million yuan (US$38 million) a year, while tax revenues have fallen by 40 million yuan a year.

"We have to create jobs for the 3,000 workers who lost their positions after the factory closures," said Huang, who is also secretary of the city's committee of the Communist Party of China.

Despite these efforts, water pollution in the areas still needs to be checked, said An Qiyuan, a member of the National Committee of the Chinese People's Political Consultative Conference, which is the highest advisory body in China.

According to An, wastewater discharge along the upper middle route reaches 120 million tons a year, which greatly threatens water quality.

Both Huang and An urged the central government to establish an effective mechanism to compensate the localities to encourage them to continue pushing environmental protection.

They suggested the government collect water-use fees from northern enterprises and residents who benefit from the water diversion project, and allocate the money to areas suffering losses.

This will help "the southern and northern people share the fruit of the water-diversion project so they can develop side by side," according to Huang.

Currently, the eastern and middle routes of the project are under construction, with total investment estimated at 200 billion yuan.