Senators OK sweetening Cruzan deal
Published: April 21, 2012
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ST. THOMAS - The 29th Legislature on Friday ratified changes to a 2009 agreement between the government and Cruzan Rum that will give the rum-maker more of the territory's rum tax revenues.
The additional subsidies are aimed at bolstering Cruzan's sales of bulk rum.
Gary Nelthropp, president of Cruzan Rum, told senators at a Committee of the Whole meeting a week ago that the competitive landscape - particularly for bulk rum - has changed in unforeseen ways that "require immediate action to prevent significant long-term harm to the Cruzan distillery and to preserve the substantial revenue stream that is so important to the USVI."
Under Cruzan's 2009 contract with the V.I. government, the government offered higher incentives to Cruzan for branded rum production, while reducing incentives for bulk rum production during a transition period. The company received incentives totaling 40 percent of coverover revenues for bulk rum production through 2010, and the percentage went down to 31.5 percent in April 2011. Starting at the beginning of this month, the incentive rate dropped to 18 percent.
The amendment senators approved Friday increases the incentives back to a total of 25 percent of bulk rum coverover revenues for an extended transition period, from now through 2018.
Sales of Virgin Islands-produced rum on the U.S. mainland generate a direct revenue stream for the territory through rum excise tax revenues.
For every proof gallon of Virgin Islands-produced rum exported to the U.S. mainland, the federal government collects $13.50 in excise taxes, of which $13.25 is returned to the territory's coffers. That money also is called the rum "coverover."
The territory used to get $10.50 back, but in 1999, Congress passed legislation that temporarily increased that rebate to $13.50 per proof gallon. That measure has been renewed multiple times since then, although it currently is expired and awaiting renewal.
Cruzan has for many years been the primary source of rum excise tax revenues in the territory, although Diageo's Captain Morgan Rum, also now produced on St. Croix, began exporting to the mainland this year and also will be a source of cover-overs.
Gov. John deJongh Jr. has sought to increase the rum tax revenue stream to the territory through deals that provide significant subsidies to rum manufacturers from the territory's cover-overs. Those deals have sparked some controversy.
DeJongh orchestrated the deal that brought Diageo to the territory, with the local government leveraging future rum tax revenues to finance construction of the Captain Morgan distillery. He also later negotiated the deal providing significant subsidies to Cruzan, which included financing to build a wastewater treatment facility at the Cruzan distillery.
Nelthropp told senators a week ago that competitors in Puerto Rico - emboldened by incentives offered by the Puerto Rican government - have taken advantage of Cruzan's lower bulk rum incentives to gain a substantial cost advantage and steal customers.
Puerto Rico suppliers have been provided an incentive rate of at least 25 percent by their government, Nelthropp said. Destilleria Serralles - which produced rum for the Captain Morgan brand, but lost the contract after Diageo signed the deal with the V.I. government - recently has "lured away" two significant Cruzan bulk rum customers, he said.
The proposed amendment to the contract was not without controversy.
Sen. Terrence Nelson said that the V.I. government and senators who voted for the Diageo deal "created this mess" but said he expected every senator who voted for the Diageo deal to vote for the Cruzan amendment.
"Today is the reason why we did not support the Diageo deal. Because we knew then that we were opening a can of worms," said Sen. Neville James, who has been a vocal opponent of the Diageo deal.
Sen. Shawn-Michael Malone said that protecting the government's rum tax revenue stream is vital and that the Cruzan amendments will keep the company competitive.
Sen. Usie Richards said he is concerned about the existing agreement. He said he is "looking forward" to the final completion of the Cruzan wastewater treatment facility, to the company doing a $75 million expansion that was part of the deal and to the government's assurance that the tax incentives granted to Cruzan and its parent company Beam are being "properly monitored."
Sen. Carlton Dowe said he did not think the government could afford to see Cruzan in a position of weakness with its competitors.
"Too much rides on Cruzan," Dowe said. He also said that deJongh and the Puerto Rico governor should sit down and discuss the situation.
"For me, this issue, the livelihood of the territory is at stake," Dowe said.
Sen. Sammuel Sanes recalled the different industries that used to be a part of St. Croix but now no longer exist on the island.
"Now is the time to do the right thing. Now is the time to give this industry a chance so they can continue doing what they do best," he said of the Cruzan deal.
After debating the issue, senators voted to ratify the amendment, with Senators Craig Barshinger, Dowe, Louis Hill, Malone, Nereida Rivera-O'Reilly, Richards, Ronald Russell, Sanes, Patrick Simeon Sprauve, Celestino White Sr. and Alvin Williams Jr. voting for the measure. Senators Alicia Hansen, James, Nelson and Janette Millin Young voted no.