WASHINGTON — Just as South Africa's black majority was on the verge of winning freedom from apartheid last year, the Clinton Administration decided to spend precious U.S. aid funds to provide them something that U.S. officials apparently deemed important: hair care.

To that end, the U.S. Agency for International Development gave a $300,000 grant--a generous amount by AID standards--to Soft Sheen Products Inc., a black-owned Chicago company, to teach African American hair care techniques to South Africans. The grant coincided with the company's decision to introduce its products in South Africa.

The money was awarded to Soft Sheen on a non-competitive basis over the objections of many experienced AID officials in South Africa, one of whom said the hair care project was widely viewed within the agency as "a joke."

Ultimately, Soft Sheen failed to fulfill its commitment to train as many as 2,000 South Africans as hair care professionals. By the company's own accounting, the program has placed only five persons in jobs.

Considered in the broader context of the multibillion dollar U.S. foreign aid program, the Soft Sheen grant marks only a small failure.

Yet at a time when Pretoria is looking to the United States to make good on its commitment to assist in South Africa's economic development, the decision to spend $300,000 on a misguided hair care project is viewed by critics--inside and outside the two governments--as emblematic of serious problems stemming from a controversial policy of racial preference that governs U.S. aid to South Africa.

The policy, issued as a directive by top officials of AID's South African mission three years ago, urges officials to give grants to black-run organizations--not only in South Africa but in the United States as well--and actively discourages grants to white-led groups.

Almost immediately, the directive aroused strong emotions, touching as it did on two volatile issues: affirmative action and foreign aid. To be sure, grants going to black groups in the United States proved to be far more controversial than those awarded in South Africa, where blacks make up a majority of the population.

Agencies Probe Grants

Complaints rose from so many quarters that the directive attracted the attention of a host of federal agencies, which are looking not only at the legality of the policy but at the appropriateness of grants stemming from it. The grants included the award to Soft Sheen, as well as $555,000 given to the Martin Luther King Center in Atlanta, $100,000 to the Congressional Black Caucus Foundation and $1.3 million to Africare, a Washington-based group that helps African nations.