Report: VI Use Of Rum Cover Over Permitted By Current Law
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.
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For me, it was never an issue of the whether or not the use of the rum cover-over revenues in the Diageo Deal was illegal or not.
My sole question and issue with this entire deal is ‘Why are we giving away so much and receiving so little in the return’. It does not make any sense. This is precisely why both on a local and national level, people are suspicious that some cash must have been slipped under the table.
Either the Governor and his cronies were paid heavily for this huge give away; or, John Dejongh is completely incapable of being Governor and obviously has no clue when it comes to negotiations or securing the financial stability of the US Virgin Islands.
In any respect, it is quite apparent that John Dejongh should have never been Governor of the USVI, much less serve another term.
Correction “whether or not the use………
please srike the “the” before “whether” and after of
I believe we have to remember that we live in a global economy. Thus, competition is everywhere and at every level of the balance sheet. Two things the Virgin Islands has pros; (1) U.S. Flag, and (2)U.S. Currency. On the flip side we are also governed by a nation of laws; EPA, Labor; just to mention two, but they both increase cost considerably to investors, Diageo in this case, thus we must compete, and offer incentives in other areas to attract business to our shores. I believe President Obama was on target in the State of the Union when he proposed taking away tax incentives to businesses that ship U.S. Jobs overseas. I believe in this instance, the Governor compromised for the best agreement the territory could offer over the long term. P.R. would stand to gain if Diageo went elsewhere, but lets give credit where credit is due.
De Jongh compromised for an agreement that benefits Diagio and (probably) himself. The benefit to the Virgin Islands is uncertain and difficult to anticipate. We may actually end up with less income.
If we never had it, how can we get any less. I believe just as in the case of Cruzan Rum, for many many years have benefited the territory with positive economic growth; the same will stand true for Diageo, just based on Cruzan’s past performance and history in the territory. Just imagine, we have 24% of market share locked in for the next 30 years.
@Another Point of View: You write a very clear argument for why you think that DeJongh wrote a good deal. However, I do not think the agreement was wise. Absolutely no one with true business sense will give incentives almost 50% of what is returned to the Virgin Islands. When considering the EDC benefits, geez they probably will be collecting pure profit.
If you look at the numbers for Cruzan Rum, we increased the incentives from around 9 million dollars in 2006 to around 19 million in 2008. However, the net cover-over was 68 million in 2006 and 80 million in 2008. The return on investment doesn’t seem impressive. Now, we have increased the incentives much more. I can’t wait to see whether we will make more or less money than before the new Cruzan deal. My prediction is that we will probably only get the same amount of money that we were getting before the new incentives, but I hope that I am wrong for the sake of the Virgin Islands.
Time will tell. Remember we were never secured in our position with Cruzan. They could have been moved at any time. We now have them both locked in for a minimum of 30 years, with almost guaranteed income streams. Remember, Diageo can only market rum produce in the Territory to the U.S.. The market currently served is 9 million proof gallons. Diageo will have the capacity to produced 20 million at completion of construction. To me that vision translates into increased market share.
APV, where did you get “DIAGIO CAN ONLY MARKET RUM PRODUCED IN THE TERRITORY TO THE U.S.”?????
If that were true, I would agree with you!
@ persona – you’re right. in fact, they only have to produce 1.5 million for the VI arrangement but can produce and sell as much as they want elsewhere in the world HOWEVER the VI must provide the molasses subsidy for ALL the rum they produce, whether it is sold in the US or not.
If you look at the document here and see just what that subsidy has cost for Cruzan rum already, it’s just another testament to how bad this deal really is.
Yes, Clock, I read the whole Diagio Deal and what you said is correct.
@ APV,
Cruzan Rum was not going to leave this territory, and this is a fact. We had the opportunity to buy it with the GERS proposal, but our great governor would not have gotten his cut if the government bought it. Just like he was trying to sell the WICO deal from under the people of the VI, but was set up by the great governor Farrelly to expose what he was doing in the cover of darkness behind closed doors. The information former Governor Farrelly had given him to share with the buyers ended up in the ears of the outside buyers and it came back to him. Dewolf was forced to resign before the embarrassment of being fired and probably held for conspiracy to undermine the VI government.
That’s why some of us can’t vote for him we know what he capable of, he should have never been the governor of the VI.
correction we know what he is capable of
With respect to the molasses subsidy, we currently pay Cruzan 14 million. After the deal, and in order to retain the current cover over revenues (~100 mil), Cruzan would have to double their capacity!! That would mean that we will be paying a minimum of 28 mil for molasses. Send help.
@ Kenrick,
So true. You know the more I study this document, the more I see what trouble we’re in. And keep in mind the amount it will cost when we add the Diageo molasses subsidy.
There’s much more to it than whether it was legal to blow this much of the cover over on these deals.
If we had said to Diageo we rather it stays in Puerto Rico or go elsewhere, would you be happy with no Diageo and nothing to give away? Would you be happy if Cruzan Rum declined to remain in the VI. had it not successfully reached an agreement with the V.I.? Is having none of these deal the best decision? Of course, it is easy to say that it could have been a better deal.True! Unfortunately, the reality is that we do not always get the things we wish for. I am wishing for a salary increase, but I will be happy to get a paycheck knowing this Governor does NOT plan to lay off any government employee.
Negotiation is the art of compromise.Either you reach an agreement or you do not.Obviously, since both parties have accepted the terms, the negotiations were successful and both are winners. Which is best, 1 rum deal, 2 rum deals or 0 rum deal? Ask the Puerto Rico Government that learned the hard way. It wanted it all but for 6% of the rum rebate. Due to being stingy and stupid, it now is going to get 0% of the rum rebate from Diageo and the VI will get 55% Do the math. Which is more, 0 or 55?
Cruzan Rum could have been purchased by any individual or entity for the right price. Cruzan Rum like any seller would have sought the best deal. It would not have made a difference if the best offer came from the V.I. Government or not. The highest bidder in this case would get the deal.In the case of Diageo, the best offer to it would be the highest percentage of the rum rebate. While it is true that Puerto Rico and the Virgin Islands are the only places that get rum rebates, this does not mean Diageo would not have been able to re-locate and operate outside of the U.S.A.There are numerous rum companies operating in foreign countries.All rums are not made under the U.S. flag.Look at the rum bottles in the rum shop.
deGreat,cheers! Bravo!Fantastic!Best deals ever!
The bottom line is that neither the V.I. nor rum companies get any money without rum being produced. It is a simple formula: x(rum produced))= x%(excise tax collected)
@Anonymous 12:31,
Use some sense. John deJongh’s negotiation of the Diageo Deal was inept and incompetent at best. Not to mention the suspicions seething from it’s core.
Cut out all the crap and do the simple math. Puerto Rico has a 10% cap on the their rum cover-over revenues. Meaning that they are only allowed to allocate 10% of their revenues to any rum company.
So why is it that John deJongh found it necessary to give away almost HALF, 45% of our rum cover-over revenues? If John deJongh had offered 20% to 25% to Diageo, those figures would still be considered very competitive.
But, no, John deJongh decided to sell us under the table, while collecting how much for himself?
We’re not stupid people, we see, hear and know exactly what went on and continues to go on behind the closed doors of the deJongh Administration.
@ Enough:
Clearly the Administration has decided it must plant its message heavily on this site. This one showed up last night with another one called “Another Point of View.” That’s fine. It says to me they realize there is something to be dealt with here.
But I think they’ll see they need to come with stronger arguments than this.
People, they is another reason the agreement the governor is detrimental for us. He feels so confident that these Diageo and Cruzan Rum would generate so much revenue, he decided to based the current budget for this government on the FUTURE monies collected from the rum distilleries. So, we are stuck with these agreements, whether we want to or not!
Inform the IG of the money slipped under the table. Always the political trickster!”Clearly the Administration has decided it must….’”do you really believe that any member of deJongh’s administration has time to read and blog on this site? Stop taking matters so serious. We are all entitled to opinions, but not our own facts. “They” are people who live here just like you probably do. We are part of the community. We appreciate the great deals being accomplished by our Governor. deGreat rules!Kiss our *****That’s your problem if you hate our Governor and can’t accept the facts.
I am an informed citizen who believes that the two rum deals made economic sense. To those who oppose the Governor,anything he does is senseless and all his supporters are stupid. That’s fine to think that;it boosts your ego. If you feel better being petty and suspicious, that is wonderful.Putting others down makes your day. In the end, you still can not change the facts. deGreat rules!The rum deals are done deals. Take a sip & chill.
Make yourselves happy by responding with your usual pettiness. If you believe you are smarter than this nameless blogger, I am happy for you.You are not convincing me that you are intelligent by simply calling others stupid or thinking that they are. Think you are smart enough to be governor? Run,run,run,run,…
As Tyler Perry says in one of his plays “What’s done in the dark comes to the light”. SHAME, SHAME, SHAME on you Governor! You’re draining this territory dry with your shoddy deals. It is apparent that you are incapable of moving the Virgin Islands forward. I encourage everyone to read the CRS Report on the Rum Excise Tax Cover-Over History and Issues and weap!