Governor Defends Captain Morgan Deal, Decries 'Deceit'

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July 7, 2008 — Comments to local radio stations opposing the government's proposed agreement with Diageo PLC, along with a campaign lobbying senators not to approve the agreement, are some of "the most shameful displays of political deceit and dishonesty I have ever witnessed," Gov. John deJongh Jr. said Monday.
Over the past few weeks, residents have flooded radio outlets with questions and comments about the agreement. Many have said that the issuance of up to $250 million more in bonds — which the Public Finance Authority will float to help finance the construction of a new Captain Morgan rum distillery on St. Croix — would put the territory more in debt. Others, such as former Sens. Adelbert Bryan and Kenneth Mapp –a former gubernatorial candidate who lost to deJongh in the last election — called into Radio 1000 Monday and described the agreement, in its current form, as "disingenuous" and "an abomination."
In a public address Monday, deJongh said sales from the production of Captain Morgan rum are estimated to return just under $3 billion in excise-tax rebates to the territory, or about $100 million to the V.I. Treasury a year, over the 30-year term of the agreement. The bonds needed to finance the project will be paid off in full by the projected revenues, and in the event that Diageo does not fulfill the obligations of its contract with the government, the company would have to cover the debt, the governor added.
The numbers are backed up in a recent article in Caribbean Business, a Puerto Rico-based publication, which says the movement of the Captain Morgan distillery from Puerto Rico to St. Croix would cost the Puerto Rican government about $100 million "in recurrent revenue every year starting in 2012 and lower Puerto Rico's rum share of the U.S. market by approximately 25 percent."
Since the St. Croix plant is not expected to be up and running until 2012, Diageo will continue to source the rum from Puerto Rico, said Zsoka McDonald, Diageo's senior director for external communications, according to the article.
Six years ago Diageo entered into a supply agreement with Puerto Rico-based Destileria Serralles for the supply of rum needed to produce Captain Morgan. The distillery's senior vice president said Serralles will "review and analyze" a "series of options and alternatives" until the contract with Diageo expires in 2011.
"It was definitely a business decision," McDonald said of Diageo's move to the Virgin Islands. "We had to find a place where we could source the rum for the future growth of the brand. It was a very difficult decision [to leave Puerto Rico], but we thought that it was the best thing for the brand.
"The U.S. Virgin Islands government took the initiative and came to Diageo and said, 'Here is something we can do together.' We thought that was very important. I didn't know if Puerto Rico could have offered the same type of arrangement."
Meanwhile, local residents have questioned whether the agreement with Diageo would jeopardize the government's current agreement with Cruzan VIRIL.
"This agreement does not harm Cruzan Rum," deJongh said in his Monday address. "I have said this before and I say it again. Cruzan knows this. Indeed, it helps Cruzan, which is at serious business risk for its continuing environmental problems that our government is working with them to fix. If the money that is left over every year after debt service from the Cruzan tax cover over is to still get to our General Fund, then we need another source of new money to pay the over $20 million dollars needed to clean up the Cruzan Rum environmental problems."
A majority of the excise-tax revenues from Cruzan Rum sales are currently pledged against other outstanding government bonds, and new money is needed to finance other debts, such as the $1.2 billion unfunded liability plaguing the Government Employees' Retirement System, the governor said when the agreement was announced late last month.
"I would like to say something to those who say they oppose this deal because they could have gotten a better deal, those who say we have given away too much," deJongh added Monday. "I would first say that one cannot give away what one does not have. And second, that we could have also gotten no deal at all. Diageo was not coming to the Virgin Islands when they decided not to renew their rum-supply contract with a private company in Puerto Rico and build their own distillery. No, they were going somewhere else until we offered them the incentives to come here. Incentives that are good for Diageo and even better for us."
According to the agreement, the company will receive certain local incentives, such as Molasses Subsidy funds used to assist distillers processing rum in the Virgin Islands, along with statutory exemptions on property, excise, gross receipts and income taxes, according to the agreement. Thirty-five percent of the excise-tax revenues will also go to Diageo for marketing efforts.
Another 8 percent of the rebate revenues would go to Diageo annually as a production incentive, starting in 2012, after the company's first year of production in the territory. The incentive payments will increase to 9.5 percent for each year that excise-tax revenues exceed $200 million.
The plant will be able to make up to 20 million gallons of rum annually, supplying every drop of Captain Morgan rum produced. The company will also sell some rum to other labels.
The tax benefits and other incentives offered in the agreement have generated concerns for at least one senator. Based on V.I. Superior Court rulings over the past few years, it is unclear whether the executive branch can even issue tax exemptions without the consent of the Legislature, Senate Minority Leader Ronald E. Russell wrote in a recent news release.
"Regardless of the legalities, the governor has placed this agreement before a Legislature that has consistently acquiesced to the bidding of the executive branch," Russell wrote. "Over the past couple of years the Legislature has abdicated its responsibility to the other two branches of government, and there is no reason to believe that the integrity of the institution will prevail in this instance."
Meanwhile, other senators have said they support the idea of bringing new revenue and jobs to the territory, but would have to carefully scrutinize the agreement when it comes before the Legislature during a special session slated for 10 a.m. Tuesday.
"If this is executed properly, it could be a wonderful opportunity for the people of the Virgin Islands and for the government to address numerous concerns with this new revenue stream," wrote Sen. Carmen Wesselhoft in a recent news release. A new revenue stream would help the government ease the burden of future property-tax increases — funds that help to sustain the annual budget — on residents, she added.
The loss of $100 million in new projected revenues is not something "I was prepared to lose," deJongh said Monday.
"This is money that I know that I and future governors will desperately need to pay down debt, build schools, build sports and recreational centers, build senior centers," he said. "Maybe there are politicians and former politicians in the Virgin Islands who are so overconfident that they feel they can do without these revenues, but I am not one of those politicians. I believe we must invest to grow. One must give a little to get a little — or, in this case, to get a lot."
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