The project will bring trams right into the centre of Birmingham for the first time in more than half a century.
Mr Baker joined city dignitaries at the junction of Corporation Street and Bull Street to start work on diverting utilities ahead of work proper getting underway by main contractor Balfour Beatty next year.
The minister said: “This is an example of the kind of infrastructure project we need to help boost growth around the UK.”
The extension will link Birmingham's two major rail stations to the historic Jewellery Quarter and beyond to the Black Country. It is expected to carry more than 3.5 million passengers a year. It is due to open in 2015, coinciding with the completion of the £600 million Gateway rebuild of New Street Station with trams stopping outside the station’s new entrance in Stephenson Street
The extension is part of a wider £127m joint project between Centro and the Black Country and Birmingham City councils which includes a larger Metro maintenance depot at Wednesbury and a fleet of 20 new and bigger trams that will increase passenger capacity and frequency of service between Birmingham and Wolverhampton to every six minutes throughout the day.
Left to right: Birmingham councillor Tahir Ali, Centro chief exec Geoff Inskip, transport minister Norman Baker and Centro vice chairman Jon Hunt