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A year ago, Kiryat Yam residents' hopes were sky-high after the announcement that the first hotel in the Haifa suburbs known as the Krayot would be built in their crime-ridden town. The blue-collar community would be transformed into a flourishing resort, as history and geography had intended.

On the morning of February 20, Kiryat Yam mayor Shmuel Siso and Rani Zim, owner of the Zim Group real estate firm, announced the signing of a NIS 5 million deal to sell a plot of land along the beach for a luxury hotel. Zim Group is unrelated to the Zim shipping company.

The complex, projected to cost $60 million, would include a conference center, commercial space and a spa.

Siso spoke of taking advantage of the town's beachfront location (the only one of the Krayot so blessed) to fulfill the town founders' aspirations of creating a first-rate tourism destination. Zim himself waxed poetic about accommodations offering views of both the Mediterranean and the lights of Haifa atop Mount Carmel.

A year later, the towns' dreams seem to have become clogged in the pipes, and a hotel has yet to arise from its pristine sands.

Haaretz has learned that the police's National Fraud Investigation Unit has begun examining the bidding process in the deal, as well as the links between municipal officials and the Zim Group, owned by brothers Rani and Adi Zim, veteran commercial developers based in Petah Tikva.

The police suspect the bid was compromised by irregularities bordering on impropriety on the part of senior town officials, including the town's engineer and legal adviser.

The initial investigation reveals that the officials may have intentionally misled committee members into believing that the construction plan matched the municipality's zoning ordinances, which set aside the area for hotels and leisure only.

Municipal representatives also said the low price presented to them by the entrepreneurs - NIS 5 million for 12 dunams - came after the tender had been announced several times without a bidder, which the police believe is untrue.

Shortly after the tender was won, Interior Ministry official Rani Pintzi sent a letter to Siso stating, "The commercial areas represent some 92 percent of the area listed in the project. This percentage does not match the size of land designated for commercial activity, 1 percent net, according to Tourism Ministry guidelines."

The winning project was a vast complex taking up tens of thousands of square meters, which according to land assessors would raise the property's value to nearly NIS 40 million. Still, the Interior Ministry authorized the tender despite the discrepancy between municipal regulations and the winning construction proposal.

The tender had been announced in September 2007. The municipality said in its participation guidelines that competitors must present a construction plan for the area "according to the goals allowed by the municipal building plan." Among four competitors for the tender, only the Zim Group reached the final stage of bidding.

According to development plans presented by the company to the municipality, a 43,000-square-meter complex was to be built along the beach. The bulk of the complex was to be devoted to a commercial center, and only 2,500 square meters to a hotel.

The discrepancy between the company's plans and those of town planners did not prevent municipal engineer Nikolai Dobrodeyev from recommending the bidding committee that convened in January 2008 to authorize the tender. Dobrodeyev said there was no contradiction between the town's plans and those of the developers.

At the same meeting, the town's legal adviser urged the committee to overlook the low price offered by the Zim Group, and to authorize the plan. The program was later given the green light by the Interior Ministry as well.