KHARTOUM (Reuters) - Sudan has signed a $396 million deal with two Chinese companies to elevate a dam in its southeast and increase its electricity production by 50 percent, one of the biggest development problems facing Africa's war-torn nation.

Sudan's Merowe Dam in the north, which will double the electricity capacity of the national grid, will begin to come online at the end of this year but Sudan remains in dire need of more power as it emerges from decades of multiple civil wars and millions of people return home.

"The heightening of the Roseires Dam is the second phase to increase the stored water from 3 billion to 7.3 billion cubic metres and increase the electricity power generation by 50 percent," a government press release seen by Reuters on Tuesday said.

It added the heightening of Roseires, on the Blue Nile near the border with Ethiopia, would also double the capacity of the Sennar Dam and boost the Merowe Dam further north.

A joint venture between two state-owned Chinese companies won the construction contract. The China International Water and Electric Corporation (CWE), which is building the Merowe Dam, and Sino-Hydro Corporation will take on the task.

The project is expected to take 43 months to complete and work will begin in May. It will be financed by the Arab Fund for Economic Development, the Islamic Development Bank and the Kuwaiti Economic Development fund.

Sudan's Dams Authority said 20,000 civilians living in the area would be affected by the expansion but said they would be fairly compensated.

Some residents displaced from Merowe say they were not fairly compensated which has caused some controversy around the building of dams in north Sudan.

The Dams Authority said the 10,000 displaced by the Merowe Dam had been granted a new house with two bedrooms, a living room and a kitchen and compensation of 500 Sudanese pounds per palm tree they owned.

The area has also benefited from a new airport, a bridge across the river Nile and a tarmac road all the way to Khartoum.