A District of Columbia businessman who for years has dreamed of transforming the trash bins of the abandoned Georgetown incinerator into a first-class cabaret, soon may see his dream turn to ashes on the auction block.

Mokhless Al-Hariri, a design consultant to the National Theatre and head of a renovation and development firm, says he is the victim of bureaucratic bungling by the D.C. government and the city's dire money problems.

Al-Hariri says city officials since 1977 encouraged and praised his project, but never got around to signing a lease for the 50,000 square feet of prime Georgetown property at 31st and K streets NW. And now the cash-short city government plans to auction off the incinerator along with 26 other properties to raise $15 million to help balance this year's budget.

City officials contend Al-Hariri is simply a victim of changing times, that once the city wanted to lease the incinerator to Al-Hariri, but now has decided to sell it, believing it will go for substantially more than $5 million.

D.C. General Services director Carroll Harvey said the change of mind is "one of the risks entrepreneurs have to take" in dealing with the city.

Al-Hariri says he thinks it is a broken contractual agreement.

He said he expects to sue to stop the scheduled Sept. 24 auction, arguing that letters, including one from Mayor Marion Barry, and other encouragement from city officials since 1977 clearly obligate the city to lease him the property.

The Barry letter in March 1979 said the city had "decided that this Al-Hariri's project is the appropriate disposition of this property."

Al-Hariri said his firm had submitted a winning proposal in March 1977 to remodel the 50-year-old structure into a combination restaurant and theater offering a variety of live entertainment. He said he put down a $7,000 deposit that the city has not returned and spent thousands of dollars on plans to redevelop the decaying building, whose intricate red-brick smokestack towers above the Georgetown waterfront.

Built in 1931 on the site of the old Suter's Tavern, where George Washington is believed to have negotiated to buy federal land for the capital city, the incinerator was shut down as a pollution nuisance in 1971. Since then its windows and doors have been vandalized and the grounds are overgrown with weeds. A small concrete and brass marker erected in 1956 to commemorate Suter's Tavern is completely obscured by a vine-tangled fence.

Included in Al-Hariri's two-inch thick record of dealing with the city is an August 1979 letter from William T. Jones, an assistant director of General Services for program management, to the Georgetown Advisory Neighborhood Commission (ANC 3A06).

"Please accept this as the District's 30 days advance notice that it is intended to lease the sub-ject premises for a period of up to25 years to . . . Dr. Mokhless Al-Hariri," the letter said. "This will cause the building to betransformed into a Dinner Theatre/Cabaret . . . . " The ANC endorsed the project.

However, Jean B. Oliver, a General Services official in charge of the auction, said this week, "The bottom line is that there was no lease. He had very good plans, but we didn't come to terms. That's the whole ball game. Times change; we decided to dispose of the property."

Oliver said the city would "love to have him come and make an offer to buy the property," but Al-Hariri said he feels the lease proposal is better and does not intend to make a bid.

Harvey also contended that Al-Hariri did not vigorously pursue the project in recent years until the city decided last April to get City Council permission to sell the surplus properties. Harvey agreed that Al-Hariri's project was a good one, but "the city needs money."

Harvey said he wrote Al-Hariri a letter on July 15 that said the city's Corporation Counsel had reviewed the history of the incinerator proposal and had decided the city "was not legally committed" to Al-Hariri.

However, one city official familiar with General Services operations said the city "was committed, if not legally, at least morally" to the Al-Hariri project and that some officials privately believe Al-Hariri has been wronged.

The businessman's project was pushed aside and languished in the short-staffed back offices of General Services for months while officials were preoccupied with wrapping up real estate deals for the city's massive new Convention Center and other major development projects, the source said.

Al-Hariri said his cabaret would net the city about $1 million a year in rent and tax revenues. He said his redevelopment would take two years to complete and that construction cost estimates have soared from $500,000 five years ago to more than $1.5 million today. High interest rates also have raised his costs, but his company is still "ready, willing and able" to continue, he said.

"The government should be mature enough to admit it made a mistake," Al-Hariri said. "Instead they are trying to ignore it, hoping it will vanish like I was a bad dream."