The city has admitted that a R6 million contract it awarded to a Johannesburg-based consultant to set up a multimillion-rand "African Jewellery City" was never put out to tender.
This is in contravention of the Municipal Finance Management Act, which states that municipalities must use a competitive bidding or tender process when appointing consultants for contracts worth more than R200 000.
The act came into effect in July - the same month the city signed the contract with Thabo Mokwena Consulting (TMC), owned by former SA Local Government Association (Salga) chief executive Thabo Owen Mokwena.
Mokwena's company was awarded the contract five days after he made a presentation to senior city officials in his capacity as a paid adviser to the Department of Minerals and Energy.
But in June Mokwena's company had already invoiced the city for R2.5m of an amount of R4m the city has so far spent on the project. His fee, as project director, is R144 000 a month.
In a statement on Tuesday, city manager Wallace Mgoqi sought to justify hiring Mokwena's company without following the required tender process.
"A view was taken at administrative level that in the nature of things, for phase one of the project, it was going to be a closed bid, having regard to the intimate knowledge and networks that TM Consulting had on the project."
Mgoqi's statement said the project was the brainchild of the Department of Minerals and Energy - but city spokesperson Sputnik Ratau said yesterday the contract had not been not put out to tender because "it was the conceptualisation of Thabo Mokwena's company TMC".
In a phone interview on Tuesday, Ratau said: "The decision was that the first phase would not be put to tender because it was the conceptualisation of TMC."
The Municipal Finance Management Act allows councils some leeway, giving them the right to dispense with procurement processes "in an emergency" or "when goods and services are produced or available from a single provider only".
Ratau said phase one of the project was a "closed bid" because "if we were to put it out to tender, nobody else would know about this concept".
Mgoqi dismissed suggestions of impropriety in the awarding of the contract, saying "the period for 2004/2005" (when the project was passed) had been given "an unqualified audit opinion by the Auditor-General".
But a source close to the audit said the project had been raised with the city management team as they were "not quite happy with the processes that were followed".
The results of the audit, which will be included in the city's annual report, will be made public only next year.
According to the source, further action could be taken by the city council in February when the report is tabled.