COSIP, Its New Allocation and Other Implications Following the Tax Reform

With the Tax Reform, Public Lighting PPPs Already in Force May Include Additional Services Within Their Scope

By Marina Fochesato Cintra and Mauricio Moysés

With the enactment of the Brazilian Tax Reform (Constitutional Amendment No. 132/2023), the permissible uses of the funds collected through COSIP (Contribution for the Funding of Public Lighting Services) have been expanded beyond the funding, expansion, and improvement of public lighting services.

Under the new wording of Article 149-A of the Federal Constitution, COSIP revenues may now be used to fund, expand, and improve monitoring systems aimed at ensuring the security and preservation of public spaces.

This represents a significant innovation for Public-Private Partnerships (PPPs) that had previously been focused exclusively on public lighting. These partnerships may now encompass relevant municipal services, enabling PPPs to finally incorporate what are commonly referred to as “Smart City” services.

Based on this new legal framework, it has become possible to include additional services within the scope of Public Lighting PPP projects as a result of the expanded use of COSIP. Such inclusions may apply even to contracts already executed or to projects whose feasibility studies are currently underway.

It is important to note that, given the recent nature of this change and the fact that it is still undergoing regulatory development, uncertainties regarding both its scope and interpretation are to be expected.

Nevertheless, the proposed amendment to the regulation of COSIP within the National Tax Code (Supplementary Bill – PLP No. 108/2024), currently under legislative consideration, introduces provisions specifically aimed at clarifying and fully defining the concepts of “funding, expansion, and improvement of public lighting services” and “funding, expansion, and improvement of monitoring systems for the security and preservation of public spaces.”

The bill seeks to reaffirm the already established and applied concept of public lighting services (including the use of COSIP to fund services and assets related to temporary public lighting networks—an issue that had previously generated extensive debate), and, most importantly, to detail the scope of the new services introduced by the Constitutional Amendment.

If approved, the bill will allow COSIP funds to be used for the following services:

“the acquisition, implementation, installation, expansion, maintenance, operation, management, and development of projects, systems, technologies, information transmission means, infrastructure, and equipment, all intended for monitoring activities related to the administration, control, security, preservation, and disaster prevention of roads, public spaces, and community and urban public facilities, throughout the municipal or district territory, including assets required for the operation of integrated control and operations centers and for the integration of monitoring management systems by the Public Administration.”

An analysis of the bill reveals that the proposed concept is broad in scope, enabling municipalities to implement comprehensive control and monitoring centers, covering public roads, buildings, and other public assets, as well as civil defense initiatives, such as alerts in response to extreme weather events.

The primary objective of expanding the permissible use of COSIP is to ensure that municipalities have greater financial resources to enhance public safety, improve citizens’ quality of life and traffic conditions, and, simultaneously, foster the integration of multiple systems essential to the effective implementation of Smart Cities.

However, while the regulation of the aforementioned constitutional provision is still pending, it is necessary to assess a critical issue: the situation of municipalities that already have ongoing PPP contracts and seek to include these new services—and the corresponding investments—within their scope, in order to provide higher-quality, more modern, efficient, and technologically advanced public services, as well as to improve overall public and asset security management.

For such municipalities, a potential solution lies in executing contractual amendments with the current public lighting concessionaires to incorporate these new services, in accordance with municipal needs and interests, while ensuring the appropriate rebalancing of the economic and financial equilibrium of the contracts.

To that end, the first step municipalities should take is to update their local legislation to reflect the changes introduced by this “new COSIP,” thereby ensuring the necessary legal certainty, as tax matters may only be altered by law.

Once such legal certainty is established, municipalities and current Public Lighting PPP concessionaires will be able to initiate negotiations and assessments for the execution of the required contractual amendments, as well as to address related implications, including quality indicators, guarantees, and other contractual provisions.

Naturally, these amendments must comply with the legal and contractual limits established under Brazilian public procurement and administrative contracts legislation, which applies subsidiarily to PPP agreements.

In this regard, an analysis of the applicable legal framework—both the former Federal Law No. 8,666/1993 and the current Federal Law No. 14,133/2021—shows that contractual amendments may be made either unilaterally or by mutual agreement between the parties, in both cases subject to the proper economic and financial rebalancing of the contract.

Additionally, quantitative and qualitative limits apply to such amendments. However, these limits should not be applied rigidly, given the fundamental differences between ordinary public contracts—typically involving less complex objects and shorter terms—and PPP contracts, which involve complex services and long-term arrangements, and are therefore subject to the natural evolution of public needs over time.

This distinction is essential to ensure that concession and, in particular, PPP contracts may evolve in line with changes in the underlying public interest, whether through qualitative improvements or through safeguarding the principle of service continuity and, above all, ensuring economic efficiency, by reducing public expenditures without compromising service quality, thereby achieving better outcomes at lower costs.

Finally, given the novelty of the subject matter, such amendments will also need to be subject to the oversight and approval of the competent internal and external control bodies of the Public Administration, particularly to ensure that COSIP funds are not diverted from their intended purpose and that their use remains fully compliant and transparent.

Accordingly, it will be incumbent upon municipalities and existing concessionaires to conduct the necessary studies to implement this new range of possibilities introduced by the Tax Reform with respect to the use of COSIP in Public Lighting PPP projects.

The authors would like to extend special thanks to Ariovaldo Pires and Patricia Ferrari for their support and contributions throughout the development of this article.