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)
The giving away of 40% instead of 5% of our cover-over revenues to the rum producers cannot be defended anywhere else but in the Virgin Islands.
Mathematically speaking, this represents an exponential increase of 800%, which translates to billions for the rum producers.
Everyday our politicians (for the most part) prove to the rest of the world that under this administration we are fast becoming third-world and third-rate.
My concern is suppose Diageo gets so tired of the fighting between the Virgin Islands and Puerto Rico that they decided to call the whole deal off, and go into business with another government. What will happen to us? The VI and Puerto Rico would both end up losing in the end.
I’m not concerned at all about this
I agree with Rock City I do not believe our future is in jeopardy.
I think we’d better hope that the issues that Rangel is facing from the ethics committee, including one investigation that is also targeting Delegate Christiansen, doesn’t have any associative effect on how the Congress views this issue.
From the perspective of somebody who has lived here and in the states, I can say that you can’t underestimate perception. The fact that the VI gave away SO much to Diageo (a foreign company) and then in almost an apology give a similar (actually better) deal from the standpoint of the percentage of the cover over to Cruzan demonstrates a real lack of business sense that is extremely hard to justify. And it doesn’t look good or smart.
And when you add in Diageo’s tax incentives,bonds, the molasses subsidy and the other breaks this British based company got in the agreement, it’s extremely hard to explain as a good business move.
I’ve always thought that if the VI had an extra $230 million to float, why not buy Cruzan when it was last up for sale and truly protect a local enterprise from the vagaries of future market changes. They could have done that, created the water treatment facility, and spent far less in total expense than Diageo is going to cost us – for the next 60 years.
Add in the upcoming expense to us with the Alpine deal and I just don’t know.
I think no matter how you look at it, we’ve got plenty to be concerned about.
Rock City/Crucian: If you think there’s nothing to worry about here, you’re not paying attention.
True that, because only in the VI and Puerto Rico can you get the rum cover over, but it is still an ugly thing between the two islands.
With Regards to this statement:
“I’ve always thought that if the VI had an extra $230 million to float, why not buy Cruzan when it was last up for sale and truly protect a local enterprise from the vagaries of future market changes.”
If I am not mistaken, Fortune bought Cruzan for about 100 million dollars. We then rewarded Fortune, by paying for a water treatment plant for about 105 million dollars. On top of that, we are giving them 45% of at least 100 million dollars due to the cover-over money. It looks like we already paid for Cruzan Rum, but we do not hold the title or an interest in the company! On the other hand, we do get money from the Cruzan rum deal, but Cruzan would have to sell 2X the amount of rum that they are currently selling in order for us to get the 100 million that we were already getting from Cruzan before this ridiculus deal. The question is, wheter Cruzan can sell 2X the amount of rum that they are already selling! Perhaps, they can, but I find that it will be challenging. I personally do not believe that they can easily or readily sell as much rum as they make. Rum isn’t something like a necessity such as food or gasoline.
Kenrick – you’re absolutely right. Your comments just point how unbalanced this whole approach was. And, as you point out, at the end, we own nothing – except the bill. Hadn’t thought about the increased production requirements either.
Where was the due diligence? Just more support for the theory that this was done to make up for the Diageo donation and not for sound business reasons.
Actually everyone, the rum market in the United States seems to be like one that of food or gasoline. The rum market is growing at an annual growth rate of 4.9%. From 2002-2006, Captain Morgan has grown 9.5%, their biggest competitor, Bacardi, is only growing at an annual rate of 3% within those same periods. In terms of market share, captain morgain has a market share of 26%. The six biggest rums have 83% market share on the rum market, the VI since the Cruzan agreement in October now owns 3 of them (Captain Morgan, Cruzan, and Ronrico). Minus Ronrico, the VI will have upwards of 30% market share.
And previous to the de Jongh administration we had actually entered into a private-public sector agreement with Cruzan Rum/Pernod Ricard & the USVI Govt. In 2006, the Turnbull administration brokered the Market Support Agreement. Where the VI govt agreed to pay 35% of Cover Over revenues generated by the new sales back to Pernod Ricard for marketing/molasses subsidy/rum promotion purposes. However, to maximize the profitability of this agreement Cruzan rum had to address it environmental issues. Which Governor de Jongh finally has done since he has RATIFIED (not created) the legislation between Cruzan and VIGVT. So my question is, where was all of the Mapp/Donastorg/Nelson/N. James supporters when this deal was being brought into the senate for a vote. Thus Gov. de Jongh had to create a new deal since Cruzan is owned by a Fortune Brands and no longer Pernod Ricard.
While I wish I could answer the question of why not buy Cruzan rum itself instead of opting into public-private agreement. I would assume even though we would all of Cruzan we would have to pay ALL costs and maintain the salary of AT LEAST 58 employees. However, we also have to assume that Cruzan does not want to be a government owned entity and only seeks the help of the government.
Diageo will not get up and leave because of the tax benefits they will receive. (90% tax breaks plus those of the Diageo deal). These are only benefits they will receive in Puerto Rico OR the VI, no where else. For them to leave would be a BAD business decision.
Good point rock city,
I would also like to mention that if this was such a bad deal for the USVI then why would Puerto Rico creating legislation to block this deal. If you are right rock city about the 2006 deal between Cruzan and the vi govt then why was puerto rico not creating an uproar then. If a deal of that magnitude could be passed then and accepted under federal laws then why not pass this one. Congress would only be wrong to block this deal.
@rock city, you say that rum is like food and gasoline, but you only talk about growth rate. Growth rate doesn’t, in my opinion, make rum comparable to food/gas. People need to buy food and many, if not most, need to buy gas to run their cars. Do people need rum in the same way that they need food and gas? I hope this isn’t the same turnbullian mathematics of 20 being greater than 80. Please explain.
The 2006 agreement capped the cover over revenues @ 5%. The 35% subsidy kicked in after Cruzan Rum sold 7 million proof gallons into the U.S. The Diageo deal and the new Cruzan deal allow for the subsidy to apply from proof gallon #1. Please get your facts straight bloggers.
So there still was a 35% subsidy or return to cruzan from the cover over revenues. Who got there facts wrong Amonymous?
40%-46% for the branded rum and 18%-20% on the bulk rum which encourages Cruzan to sell branded rum and in turn shift the bulk rum market to Diageo who gets a 35%-43% subsidy across the board, branded or bulk. In other words, Diageo wrote the Cruzan Rum deal.
If I may ask can please tell me which clause this is or where in the agreement?
I still don’t know who anonymous is addressing when he says your facts right.
Enjoy reading everything in Section 5.1 of the agreement STX Massive. It starts on page 19. After you’re done, go have some more of the Mafolie Kool-Aid. Of course, as a chaser to the Cruzan Gold. Get It?
Crucian4life, your assignment is to read Section 6.1 and beyond and you’ll get your satisfaction in the private sector loving numbers you see there. The facts are right there for your reading, specifically 6.1.6,(b)ii. Subtract what the GVI gets from 100% in all of those areas and your difference is what we are giving up. Happy Thanksgiving. Heck, Happy Holidays!!!!!!!
Union blasts USVI rum tax deal with Diageo
http://www.cnbc.com/id/34281548