The first light rail vehicles built by Bombardier are scheduled start running on the streets of Toronto in 2012. (Canadian Press)

What should have been a good news announcement about jobs and manufacturing in Ontario has been overshadowed by the federal government's reluctance to pay part of the bill.

Toronto Mayor David Miller and Ontario Premier Dalton McGuinty travelled to Thunder Bay on Friday to formally announce a $1.2-billion contract with Bombardier to build a fleet of streetcars for the transit system in the provincial capital.

The Toronto Transit Commission recommended the deal in April.

On Friday, the agreement to buy a fleet of 204 low-floor streetcars was announced by Miller and McGuinty, with Ontario promising $416 million.

"Our investments in transit are creating jobs, easing traffic congestion and helping make the air we breathe cleaner," McGuinty said in a prepared statement.

Toronto will pay about $400 million of the bill.

The only trouble is Ontario and Toronto are missing Ottawa's third of the money.

The new streetcars will replace Toronto's aging fleet. (Canadian Press)

Ottawa has refused to write a cheque for $400 million, saying the new streetcars are not covered under the terms of the government's infrastructure program. That program, it says, is for roads and bridges.

Federal Transport Minister John Baird has also said the streetcars don't qualify for the infrastructure money because the contract isn't scheduled to be completed before the government deadline of March 2011.

In the House of Commons on Friday, Baird refused to be drawn out by Liberal Leader Michael Ignatieff,

"One of the requirements for that stimulus fund is that we get projects moving quickly and that they conclude within the next two years. That was the plan that this House supported, that was the plan the leader of the Opposition supported … and we're moving aggressively to create jobs in Toronto now, not in the next five or 10 years," Baird said.

Reports dismissed

In an interview with CBC News, Miller pointed out that Ottawa would be foolish to ignore the 250,000 people who travel on Toronto streetcars every day, and he dismissed reports from last week that Baird had used unflattering language to dismiss Toronto’s claim.

"Minister Baird and I have a very direct relationship and we talk. I don’t have any problems with Minister Baird at all," Miller said.

McGuinty said he's optimistic the funds will come and in the meantime, he intends to push the federal government.

“We have some time and we’ll do whatever we can to … prod, provoke, cajole, encourage — whatever we might — to get the federal government to come to the table,” McGuinty said.

Both McGuinty and Miller said the project is a stimulus program that will create thousands of badly needed manufacturing jobs in the province.