The federal government will contribute $600 million to transform Ottawa's transit system, making a switch from buses to light rail with a downtown tunnel through the city's core and 12.5 kilometres of light rail between Blair Road and Tunney's Pasture.

Transport Minister John Baird made the long-awaited announcement Tuesday morning, matching the funding already promised by the Ontario government.

"We're now putting all our eggs in one basket, but now these are the only eggs left," Baird said, noting there won't be any more federal money for the project.

The minister said he expects the city to use the funding to put towards a "practical and affordable" plan for the City of Ottawa.

The first phase of the project was originally pegged at $1.4 billion; then it climbed to $1.8 billion. Now, the total cost for phase one is estimated at $2.1 billion.

City doesn't anticipate tax hike

The city will be on the hook for the $900 million funding shortfall. Although some question the affordability of the project, city staff believes the city will be able to cover its portion of funding without raising taxes.

"The city can afford $900 million and we don't anticipate a tax increase as a result of this project," said Mona Monkman, deputy treasurer for the City of Ottawa.

In October 2009, the city treasurer put out a memo saying the city planned to pay for its share of funding by a combination of development charges, gas tax funding, and the existing transit portion of your property bill.

The $900-million investment will be spread out over seven years.

• $435 million will come from development charges
• $375 million from gas tax revenues
• $75 million from existing property taxes

However, some city councillors remain skeptical about the cost of the project, noting the city's treasurer has warned the true cost could be as much as 25 per cent more than the current price tag.

"There's no doubt about that in my mind that ultimately taxpayers are going to pay more," said Coun. Diane Deans.

Downtown tunnel

Although Mayor Larry O'Brien told CTV Ottawa the master plan for transit may be tweaked, he said the tunnel is non-negotiable.

If a downtown tunnel is not built, the city predicts it will have to send an articulated bus through the downtown core at the rate of one every 18 seconds to meet demand for transit by 2031.

O'Brien said the current plan is the one the city is going to move ahead with, noting that other levels of government want to make sure the city makes an affordable choice.

"They want us to make it work. They want us to make sure we're not delivering a Cadillac, when we can deliver a Chevrolet.

"They want to make sure that we're being cost-effective, and that the bidders, the private sector part of this process, that they've sharpened their pencil right down to the point where we can fit it inside the envelope of the funding we have," he said.

Replacing a cancelled project

The city's current plan for transit replaces a north-south light rail line that was cancelled following the last municipal election.

In September 2009, the city agreed to a $36.7-million settlement with a consortium led by Siemens over the cancelled light rail contract. At the time, the mayor said the cost of cancelling the contract was a better financial decision than going through with it.

O'Brien says the city's new vision for transit is one that he believes will suit Ottawa's transit needs for decades to come.

"In 2006, we stopped a plan that nobody liked. Today, we've started a plan that will solve problems in transportation for the balance of this century," said O'Brien.

He predicts it will take about one year to complete the procurement process of the new plan.

Construction on the first phase of the project is expected to begin in 2013, with a completion date of 2018.

With files from CTV Ottawa's Kate Eggins