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"People in the water source regions have contributed greatly to water resource preservation by shutting down large number of plants in their effort to protect the local ecosystem," said Huang Wei, a lawmaker from Ankang City of Shaanxi Province, a major water supplier of China's mammoth south-to-north water diversion project.

The project, designed to send water from China's longest Yangtze River to the north via the eastern, middle and western routes, is to begin supplying water to Beijing in 2008, to help alleviate water shortage in this arid northern city.

To ensure the water quality, the localities along the routes have to close their pollutant plants and turn to environment-friendly projects. This has created financial burden to the local governments.

In Ankang City alone, 16 enterprises that produced huge profits and also heavy pollution have been shut down, and as a result, the city's industrial output value and tax income was reduced by more than 300 million yuan (38 million U.S. dollars) and 40 million yuan (5.12 million U.S. dollars), respectively, per year.

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

Pollution of water in the areas also needs to be checked despite these efforts, 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 the water quality.

Both Huang and An urged the central government to establish an effective mechanism to compensate the localities, so as to encourage the enthusiasm of the localities in 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 for water source protection.

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

Currently, the eastern and middle routes of the project are under construction, with total investment estimated at 200 billion yuan (25 billion U.S. dollars).