Report: VI Use Of Rum Cover Over Permitted By Current Law

February 8, 2010

Report offers new insight into costs of subsidies, long term financial impact of Diageo, Cruzan deals

(Editor’s Note: CIF would like to thank Delegate to Congress Donna Christensen for providing us with a copy of this report.)

The government that receives the rum cover-over has the discretion to spend it as it pleases, and legislation brought forth by Puerto Rico limiting its use would violate the Congressional intent of the rum rebate program.

That is the conclusion of a report issued by the Congressional Research Service on January 20, 2010. The report and its conclusion have been publicized recently by the Administration to support the financial arrangements regarding the use of the cover over revenues in the Diageo and Cruzan rum deals.

The report, attached here, provides a summary of the rebate program and is a balanced review of the issues raised by the recent VI rum deals. But equally interesting is the information contained in this report regarding the current and future costs of some of the provisions in both of those deals for the Virgin Islands.

The report directly addresses the impact of Bill HR 2122, legislation proposed last year by the government of Puerto Rico that would limit the use of the rum rebate for economic development to 10% of the amount received by the Territory.  Puerto Rico limits use of the rebate to 10% of the total received and advanced the issue after the Virgin Islands committed 45% and 46% of cover over revenues respectively to the Diageo and Cruzan deals.

Under current law, the excise tax collected on rum imported into the United States is returned to Puerto Rico and the Virgin Islands in the form of a rebate. According to the report, in 2008, Puerto Rico received over $371 million and the VI received close to $100 million.

The VI rum deals have been hotly debated both inside and outside the Territory. Many have questioned whether such a significant portion of the rebate should be diverted in the name of economic development and away from use in internal infrastructure improvement. The report addressed this issue as well, saying that although the current law does not restrict how the government can use the revenues, that the economic crisis could cause the US Congress to revisit the rebate program if it is determined that the VI is using the funds “unreasonably” to support rum producers.

Several other interesting aspects of the Virgin Islands deals are discussed in this report, including the cost of debt service for the Diageo $250 million bond issuance ($12.2 million in 2010; $16.7 million from 2011 to 2013; and $20.6 million from 2014 to 2038) and specific information on the cost of the molasses subsidy paid to Cruzan rum between 2003 and 2008 – subsidies are also a part of the Diageo deal and will continue for Cruzan rum.

We post this full report for your review. Whatever your opinion of the Diageo and Cruzan deals, it provides more specific information on the current and future impact of these contracts than any document we’ve seen to date and is definitely worth the time it takes to read.

Rum Cover Over Report

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40 Responses to “ Report: VI Use Of Rum Cover Over Permitted By Current Law ”

  1. Loose the Dragon on February 9, 2010 at 3:23 pm

    Sorry! I’m angry. The word is weep!

  2. Due Diligence on February 9, 2010 at 4:37 pm

    Does anyone have the analytics that support the VI investing capital funds into rum production?

    Constructing multi-billion dollar agreements would require due diligence. Wouldn’t it?

    Over the course of (30) thirty-years how much money will come back to the VI for cover over, excise taxes, other taxes, agreements/finder’s fees between rum producers and local businesses, that will feed the treasury and/or provide jobs?

  3. EyesWideOpen2010! on February 9, 2010 at 6:07 pm

    Ok let us summarize:

    1. Of the approximate $100,000,000 we received last year from Cruzan rum cover-over taxes, we only expect to receive about $56,000,000.00 this year since Cruzan’s cover-over has been increase from 4% to 46%.

    2. Of our remaining $56,000,000, we have to pay down a portion on the $250,000,000 bond loan we took to Construct Diageo’s plant.

    3. of what’s of the $56,000,000, we must pay for Diageo’s molasses.

    Now, what part of this so-called deal is a great deal for the Virgin Islands?

    Someone, anyone please enlighten me!

    This is what is referred to an Corporate Welfare.

  4. EyesWideOpen2010! on February 9, 2010 at 6:10 pm

    Typo Correction:

    Ok let us summarize:

    1. Of the approximate $100,000,000 we received last year from Cruzan rum cover-over taxes, we only expect to receive about $56,000,000.00 this year since Cruzan’s cover-over has been increase from 4% to 46%.

    2. Of our remaining $56,000,000, we have to pay down a portion on the $250,000,000 bond loan we took to Construct Diageo’s plant.

    3. And what’s left of the $56,000,000, we must pay for Diageo’s molasses.

    Now, what part of this so-called deal is a great deal for the Virgin Islands?

    Someone, anyone please enlighten me!

    This is what is referred to Corporate Welfare.

  5. Due Diligence on February 9, 2010 at 8:02 pm

    I’m not sure if it’s a good deal or a bad deal.

    Just looking for the “cost benefit analysis” that supports entering into these agreements.

    What underlying financial data provides the decision to support executing the agreements with foreign companies?

  6. Anonymous on February 9, 2010 at 8:45 pm

    It is much too complex for you to grasp. Do not worry. It is a done deal and you can not turn back the clock. Get over it!deGreat rules!If you are sick of hearing this message, stop reading these posts. Go drink a cup of mint tea.It will calm your nerves.

  7. EyesWideOpen2010! on February 9, 2010 at 9:45 pm

    @ Anonymous on February 9, 2010 at 8:45 pm,

    it sounds as if you are getting tired and beginning to lose energy.

    You’re beginning to drag!

    Where is your Bang! What I just heard was a Puff.

  8. We need a Mapp on February 9, 2010 at 9:46 pm

    I am so happy I came from a MAPP 2010 meeting tonight and we had at least close to 300 supporters in attendance. Seems like people are getting wiser and understanding what’s at stake. dewolf is about to get what he is looking for, ask Schnieder. If we have so much people coming out this early hmmmm, I can’t wait until he announces his running mate just before carnival. From what I heard he’s getting many offers ( he’s no longer seeking they are coming willingly) and some coming over from the other camp. This is going to be a good race. Verdel look out at the Ag/fair we want you to be close to an EMT cause your heart is going to stop.

  9. I Understand on February 9, 2010 at 9:55 pm

    I drove by Gertrude’s, is that where the meeting was? Well, there was so many cars there I was wondering what was happening there tonight. Very impressive show of support. This going to be an unprecedented race, we going to see the fall deworst governor.

  10. Anonymous on February 9, 2010 at 9:59 pm

    The real bangs are removed by CIF.
    This is a shame. Free speech is not free. The truth is an offense, therefore, it is hidden. Well, I prefer to be blunt, but the fragile souls just can’t take the blows.

  11. I Understand on February 9, 2010 at 10:25 pm

    @ anonymous 9:59pm

    No your @** is crazy. Paleeze! get some serious help. Your not going to make it to November 2010 mentally intact. But then again, it’s my bad, your not mentally stable anyway.

  12. EyesWideOpen2010! on February 10, 2010 at 8:01 am

    @ We need a Mapp on February 9, 2010 at 9:46 pm,

    If what you say is so, that’s GREAT!

    In the end, on that final day, in the voting booth, on November 2010, I will emphatically vote for who is LEFT STANDING: Mapp or Donastrog OVER de Jongh.

    Governor Mapp or Governor Donastorg January 2011!

  13. Another Point of View on February 10, 2010 at 9:21 am

    In the Diageo agreement, it states that rum produced in the Territory can only be sold in the U.S. Don’t rely on misinformation. It’s in black and white in the document.

  14. The Clock Is Ticking on February 10, 2010 at 9:40 am

    @ Another Point of View

    What document did you read? Look at Exhibit D in the agreement posted in the Document Library (Diageo Agreement, Part 2) on this site. It clearly shows the minimum requirement for production per this agreement is 1.5 million gallons and elsewhere in the document it states how much beyond that amount Diageo would have the capacity to produce in later phases of the project.

    If you’re going to post, at least know what you’re talking about.

  15. Another Point of View on February 10, 2010 at 10:41 am

    I am addressing where the Rum from Diageo produced in the Territory can be sold. It doesn’t make a difference if it is 1.5 million or more…not sure what you are talking about. Get your facts straight

  16. The Clock Is Ticking on February 10, 2010 at 10:51 am

    @ APV
    Ok. Once more then I am done with you.

    There is no restriction on where Diageo can sell its liquor as long as they produce 1.5 million to meet their contractural obligation to the Virgin islands.

    My facts are straight. Can you read?

  17. Anonymous on February 10, 2010 at 2:37 pm

    Clock,

    It is apparent she can’t read. She listens well and then repeats.

  18. Another Point of View on February 11, 2010 at 11:03 am

    As I began my conversation, Time will tell…let’s hope that we all can admit wrong when the time comes.

  19. Another Point of View on February 11, 2010 at 11:05 am

    by the way, reading is apparently not your problem….it’s comprehension.

  20. Wake Up on February 21, 2010 at 10:31 am

    The costs are rising and the division is growing: http://www.mcclatchydc.com/homepage/story/86823.html

    I wonder what Barbara Petersen, Jean Greaux and Governor deJongh have to say about divisiveness? They were pretty busy during the 2006 campaign throwing around that word. Now their Administration will be labeled divisive and incompetent!

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