Cover-Over Battle Threatens VI Revenues
In recent months, Gov. John P. deJongh Jr. has described Puerto Rico’s objections to the Diageo rum deal as those of a sore loser who lost the rum producer’s business to the Virgin Islands.
But a bill on being considered in the US House of Representatives (HR 2122) that would modify the use of the revenues, as well as the spike in global attention resulting from provisions in the Diageo and Cruzan Rum deals, may diminish the Puerto Rico factor to the least of the problems. Recent developments in this issue were highlighted on the Mario Moorehead radio program on Saturday and the recent spike in attention to this situation is worth another look.
The larger controversy revolves around use of the “rum cover over” a program  that began in 1917, when the U.S. government decided to tax Puerto Rican rum-makers on rum sold within the United States. After the money was collected, most of it was passed along to Puerto Rico for economic development and infrastructure needs. In 1954, the same benefit was extended to the Virgin Islands.
The Diageo deal will return 45% of the cover over revenues to the rum producer; the recent Cruzan deal will return 46% of the revenues to Cruzan. Puerto Rico caps the amount of the revenues it returns to producers at 10% – and there is the heart of the controversy.
The rum excise tax was set at $13.50 per proof gallon. Historically, the government has passed along $10.50 per gallon to the two territories. In 1991, the government began passing along even more — $13.25 per gallon — but that extra $2.75 must be approved periodically by Congress. It has done so without fail, most recently through the bailout legislation. That extra $2.75 is up for approval at the end of this year.
The use of bailout funds in the Diageo deal focused the attention of stateside legislators even further as the deal will send some $2.7 billion of the cover over to the British based producer – thereby raising questions as to why funds designed to assist the US economy are going to a non-US company.
The Governor sent the attached letter to House Ways and Means Committee Chairman Charles Rangel last week, outlining his defense of the deals as critical to the future financial health of the Virgin Islands. But as the series of attached articles will show, these deals are being subjected to a much higher level of scrutiny as the mainland struggles with its own financial crisis.
The controversy once again highlights the danger in the borrow-and-spend pattern set by this Administration. Consider for a moment the impact if the extra $2.75 of the cover over is not approved. What happens if a law is passed that caps the use of the cover over revenues? Would that put the Diageo and Cruzan deals in jeopardy? And what of the impact on the already strapped financial resources of the Virgin Islands if maintaining those contracts would require that their share be paid out of a reduced revenue return?
At this point, the whole world really is watching.Â
(Note: Thanks to CIF bloggers for providing the rumbailout.org summary website)
Check this website. Capitol is trying to put a cap on the revenue the VI would collect on rum sold from Diageo!
http://thehill.com/business-a-lobbying/71073-dla-piper-clients-at-odds-in-rum-battle
Breaking news: Cruzan Rum to file bankruptcy! The Puerto Rico response to match the dastardly deJongh rum deals gave Bacardi the ability to start flooding Cruzan out of the market. And straight into bankruptcy. So instead of $100+million annually to half that after the Diageo disaster, and soon 0$, since PR saw them and raised them. Which is poetic since 0 is the exact number of bottles that Diageo has made so far. So for the loyalists who said “how can you lose what you never had?” referring to the Diageo debacle, there’s your answer. For the thinkers among us who made impassioned pleas to the senate to strike down the deal or alter it, you were sooo right. And when we consider that Diageo was willing to alter the deal after you-know-who’s testimony, but deJongh said ” no, leave the deal as is.” (maybe he would have lost his “tip”) and now we will have no rum produced on Stx. Look out for another 8% cut from the “Guru Governor”, the scholar of financing, the great business hope. VI Restore Hope? Democratic Party? Chamber of Commerce. Radio silence? Hmm.
You heard it first from Vegan. Ciao.
My Goodness. Major trouble ahead from this financially.
@ CFI Is this the truth about Cruzan? this is not something to play with, because if it is so, we are in a lot more trouble than any of us know.
@Vegan….Where’s your source??? You have no credibility!
Authentication should come in a month. How many times was Cruzan sold in the last 6 years? And how much revenue did Bacardi keep from the rum deal to be put towards ads (which we see on national tv not cruzan ads) and towards competitive prices in order to kill both Cruzan and Diageo. Oops. Diageo rum is not alive yet so Bacardi can’t kill it.
CIF I hope I am wrong. The death of Cruzan is the death if us all.
You make no sense Vegan! Give it a rest.
@ anon 7:58 Don’t get vex cause you are among those that swear the Diageo deal was brilliant and John is doing a great job. Vegans sources run deep and just about all the warnings that were put out to the public by Vegan and others has been accurate, with many coming to past. The only people void of credibility is the De Jongh administrations and those who continue to lie for and assist in shoring up a corrupt ,illegitimate government that’s nothing but a big sham.
God bless these Virgin Islands and her people. Hopefully this will not occur for the sake of us all.
I don’t think it’s true. There was just a spin off. Fortune Brands is not Beam Inc. They made 2 companies to trade publicly. Spirits and golf and then Home security.
It isn’t plausible? Well let’s work through it.
1. First we give Diageo a ridiculous deal: 45% compared to 10% in PR.
2. Then we have to match Cruzan to the deal losing $50 mill/yr.
3. Then PR matches Bacardi to same ridiculous deal.
4. Bacardi now has hundreds of millions to spend on ads and discounted rum.
5. Cruzan Rum’s revenues begin to….?
You fill in the blanks then. Who knows? You may have a source that confirms that Cruzan is rolling in profits in which case you should share that with us. Again, I would like to be wrong. Meanwhile, do have a fix regarding in which decade will Diageo will make their first bottle of rum?
This is the source on Beam Inc.
http://www.reuters.com/finance/stocks/companyProfile?symbol=BEAM.N
10% of 0 = 0
55% of $13.50= $7.42
diagios rum is agening in the barrels
why is perto rico so upset?
they stand to loose $12.15 for every gallon of rum diagio sells
we stand to gain $7.42 from every gallon of rum sold.
now $7.42 dosent sound like much but the diagio deal can off set the $2.75 if the federal goverment takes it away and we will still be $4.67 per gallon richer then we were befor diagio.
whileim not the biggest fan of the deal made with diagio because of what we had to give up tax wise/ public funds to get it, iam a bigger fan of the V.I. than P.R. in the end we get revanue we didnt have befor even if the deal was not ideal. the cruzan run thing is just one big threat we face theres talk of shutting down or selling hovenza
Paul. You forget the molasses subsidy, including molasses for overseas sale = 0% coverover. And it’s $11.25 without the extension not $13.50. Congress does not guarantee the extension. And we used to get 95% of 120$ million With Cruzan; now we get 54%. and until Diageo sells the first bottle of rum (in the us) we get 55% of zero. And %100 of Diageo’s mortgage payment. How bout them apples?
10.50 w/o the extender and 13.25 when approved by Congress
vegan the new deal with cruzian ws for them to double there production with a net gain of 6% above what they pay now, we lost nothing we gained 6%.
diagio is like a ew fruit tree we arejust waiting for the fruit to get ripe, my point was have two ways to go to increase revanues, tourism,and production of goods, one makes us like most carrribbian islands relying on bad deals with the cruise industry and high priced air fairs, bad deals with hotels.remember the kick backs to cruise ships thing,the waving of port fee’s, the bumperto bumper trafic. the other makes us have to entice production industrys,we were in competition with other islands that offered more to diagio, we were not the least expensive option they had, diagio took into consideration how well crucian rum has done here and took our deal.
one thing is certin change will come to st croix despite many peoples objection, our options are limited and anything someone dose can be pulled apart, I was in florida when dysney world was built, dysney wanted free land, its own town and waivers for workers right to unionise tax waivers for propery. the people of florida spend billions of raods and infastructure in the orlando area, but this is what it takes to secure revanue streams.
imajine this our island with no hotel beds , no industry and no refinery,s, no renasance facility, compared to other islands we have low taxes, low fuel costs and little depandance on tourist. if along the way we make a mistake or two we are still better off than most, the economy is hitting us hard but our people are for the most part friendly and trying there best to make it thru,our politicians and rich people are exactly like politicians and rich people everywhere. th deagio deal was the least intrusive option on the crucian way of life that i can see. the deal isnt perfect because we had to compeate to get it with those offering more.
So in other words, Paul, Diageo is not so bad compared to what we had? That’s the best thing you can say about the dummy deal? The deal that may drive Cruzan into the ground because of the Bacardi match. The dumbdumb deal that does not require Diageo to sell any rum to the US markets. So with the emerging markets in India and China we may never get a cent in cover over. And with cruzan gone the equation is Cruzan + Diageo – Cruzan = Zero. The VI + deJongh = -1. The money we spent on the distillery could have bought a vocational school, a power plant etc. Instead we are waiting for small hardware stores in Stx to close, stop paying gross receipts, and send their people to our unemployment offices.
DeJongh sucks. Accept it, Paul.