Senate Opts for More Time to Mull Captain Morgan Deal

July 9, 2008 — More than 10 hours of testimony and debate during Tuesday's special session was not enough to sway senators to approve or turn down a proposed 30-year agreement between the government and Diageo PLC for the production of Captain Morgan Rum on St. Croix. The Legislature will take up the matter once more during another hearing scheduled for 10 a.m. Wednesday.
The session — called earlier this month by Gov. John deJongh Jr. — was riddled with questions from both senators and local citizens. Concerns touched on everything from the negative impact the agreement might have on the territory's Cruzan Rum industry to what kind of Economic Development Commission tax benefits and incentives the Diageo would be receiving. The same kind of benefits, some said, should have also been offered to Cruzan VIRIL, which has served the territory for 70 years.
Fears that Diageo would be reaping more from the deal than the V.I. government and the "people of the territory" took center stage as senators made their feelings clear and didn't mince words when talking to Diageo representatives and members of the governor's financial team.
"To give the people's money away to a foreign company replete with cash and equity is mind-boggling," said Sen. Neville James, who prepared a written statement for his first round of questioning. "There is economic development and then there's giving away the ranch.
"These flat giveaways of excise tax rebates create a cause for concern. The agreement is simply too one-sided against the territory. Free project, free property, free tax exemptions and the people's money force me to say — so much for our negotiating skills."
As the world's leading wine and spirits corporation, Diageo should already be pulling in enough money to finance the project on its own, instead of relying on the issuance of up to $250 million in tax exempt bonds floated by the Public Finance Authority, James added. That sentiment came up often during the session, despite statements from Diageo representatives that without the incentives offered by the V.I. government, it would be cheaper for the company to produce the rum elsewhere and sell it to a variety of markets. As the agreement currently stands, Diageo "can't get revenues" if the rum is shipped anywhere other than the U.S. mainland, according to David Gosnell, Diageo's managing director of global supply and global procurement.
Diageo representatives also took a firm stance, saying that a delay in approving the agreement would allow others to pursue a deal with the company — including Puerto Rico-based Destileria Serralles, which currently has an agreement with Diageo for the supply of rum needed to produce Captain Morgan.
Union workers from Puerto Rico campaigned outside the Senate Tuesday and urged senators not to vote for the agreement, saying that it would bring a significant loss of jobs and revenue to the island. Meanwhile, the president of Puerto Rico's Treasury and Financial Affairs Commission, in a letter to Senate President Usie R. Richards, said the proposed agreement with the V.I. government could "put in peril" excise tax rebates for "all" U.S. territories, since it extends certain benefits to Diageo that goes "beyond the legislative intent" of the federal rebate program.
The federal government currently collects $13.50 in excise taxes on each proof gallon of V.I. produced rum sold throughout the mainland. Of that amount, $13.25 is remitted to the V.I. government.
"The longer this deal is open, the more people will be talking to us," Gosnell said during Tuesday's session. "We have to make that crystal clear — it will open up other opportunities for people to come in."
The bonds needed to finance the project are structured in a way that would allow the government's investment to be "completely" paid off from projected excise tax revenues, Nathan Simmonds, the governor's senior policy advisor, said earlier in the hearing. Additionally, annual debt service payments on the Diageo bonds would be made only after payment obligations on the government's outstanding 1998 series bonds are taken care of, he said.
Marketing and molasses subsidies given to Diageo will also be paid after the government receives its cut of the excise tax revenues and a deposit is made into a special fund created to subsidize community and sports facilities, other officials said.
How the agreement will impact the future of Cruzan Rum in territory was also a concern for senators and residents.
When the agreement was in the first stages of negotiation, representatives from Cruzan VIRIL were on board with bringing Diageo into the territory, members of the governor's financial team said during the first half of Tuesday's hearing. However, a letter from Cruzan's president — which was read into the record toward the end of the meeting — said the company should be receiving the same type of tax benefits and incentives offered to Diageo. Without the additional security, the agreement would "put in danger the sustainability" of Cruzan VIRIL.
While Simmonds said the government is ready to negotiate a long-term agreement with Cruzan VIRIL once the company is able to come to the table, some senators pointed out that revenues garnered from the proposed Captain Morgan Rum distillery — which is expected to total nearly $3 billion over the course of the agreement — would pull in more for the government than Cruzan Rum sales has generated over the past 70 years.
"We should commend the governor and the delegate for seizing an opportunity to entice Diageo to seek a place in the Virgin Islands, and to bring home Captain Morgan and the bacon," said Sen. Norman Jn Baptiste. "And by the way, I do love a good piece of pork."
Should Diageo decide to abandon its plans, there are no other developments currently in place for St. Croix that would bring in a comparable amount of revenues in the next two to three years, Simmonds said later.
All senators were present during Tuesday's session.
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