Bacardi, World's Largest Recipient of Public Rum Subsidies, Leads Hidden Campaign to Drive Rum Competitor out of the United States and Destroy the Economy of the U.S. Virgin Islands

NORWALK, Conn., Feb. 23 /PRNewswire-FirstCall/ -- Diageo North America on Tuesday released the following statement from Guy L. Smith, Executive Vice President:

An historic and innovative public-private initiative forged by the U.S. Virgin Islands that would lift the U.S. Virgin Islands' economy out of crisis is under attack by the entrenched corporate interests of a wealthy family seeking to maintain their decades-long grip on rum subsidies.

Bacardi Limited, which receives tens of millions of dollars a year in annual government rum subsidies, has made a calculated decision to try to drive a competitor out of the United States even though it would be a disaster for the U.S. citizens of the Virgin Islands.  And why is Bacardi doing this?  They know that because of a quirk in federal law they can protect their huge government subsidies by driving Captain Morgan rum production anywhere rather than the U.S. Virgin Islands.

The company has been working behind the scenes in collaboration with other self-interested constituents and corporations and has used front groups and Puerto Rico politicians to make spurious claims about the U.S. Virgin Islands initiative.

Nearly two years ago, the Government of the U.S. Virgin Islands seized an historic opportunity to modernize the centuries-old Caribbean rum industry through a landmark public-private initiative that both protects the environment and provides 30 years of economic stability for the U.S. citizens of the Virgin Islands.

The resulting agreement between the U.S. Virgin Islands and Diageo is crucial to the U.S. Virgin Islands' long-term economic stability and benefits the U.S. economy by keeping Diageo's rum production in the United States.  This public-private initiative will be the U.S. Virgin Islands' economic engine for the next three decades and beyond.

The media has written a lot about the U.S. Virgin Islands initiative, and much of it has been based on misleading attacks by Puerto Rico officials, their entrenched corporate allies, and several front groups.  The media has largely disregarded the fact that the U.S. Virgin Islands has the same right to rum cover-over revenue as Puerto Rico under long-established federal law.  Nor has the media asked the most basic journalistic question: who stands to benefit from overturning the U.S. Virgin Islands initiative?

• Bacardi, a non-U.S. company based in Bermuda, is currently the leading beneficiary of rum cover-over subsidies, including tens of millions of dollars a year in marketing assistance from the Puerto Rico government.  But Bacardi is losing market share to Diageo's Captain Morgan rum brand and that competition will continue when our company moves to the U.S. Virgin Islands, which is building the world's most efficient and environmentally sound rum distillery.
• The Conservation Trust of Puerto Rico, a group that gets its funding from rum cover-over revenue and has chosen to overlook Bacardi's troubling environmental record, has said it is working closely with "rum-makers including Bacardi and Serralles to get Congress to consider legislation that would overturn the Virgin Islands initiative."(1)
• We know that in recent months, Bacardi officials and lobbyists have visited numerous Congressional leaders.  They also have participated in meetings with Puerto Rico officials to oppose the U.S. Virgin Islands initiative.
• Destileria Serralles executives also visited key Congressional offices to lobby against the agreement and he has recently made the outlandish claim that the United States may risk World Trade Organization sanctions in connection with the agreement.(2)
• We have been informed reliably that Bacardi is a backer of the National Puerto Rican Coalition (NPRC), the leading critic of the U.S. Virgin Islands initiative, and recently orchestrated a sham poll announced by the NPRC alleging strong opposition among Puerto Ricans in Florida to the U.S. Virgin Islands initiative.
• The National Puerto Rican Coalition has been the loudest front group in the anti-U.S. Virgin Islands initiative campaign, urging the Hispanic community, both in Puerto Rico and throughout the U.S., to boycott Diageo goods.
• The National Black Chamber of Commerce and the Florida Black Chamber of Commerce have raised the question of why Florida Senators and Senate candidates are intervening in a local economic dispute between Puerto Rico and the U.S. Virgin Islands.(3)  In our opinion the answer lies in the fact that the most powerful Cuban rum-producing family in Florida is engaged in this local dispute and lobbying Florida politicians to overturn the U.S. Virgin Islands agreement for its own commercial ends.

(1) "USVI rum deal threatens Conservation Trust land acquisition program." Puerto Rico Daily Sun 27 Jan. 2010.

(2) "Captain Morgan Subsidies May Trigger W.T.O. Complaint." National Puerto Rican Coalition Press Release, 16 Feb. 2010.

(3) See: National and Florida Black Chambers of Commerce Letter Urging Reconsideration of Anti-U.S. Virgin Islands Proposal. FBCC/NBCC Press Release 18 Feb. 2010.

While these parties have chosen to work largely hidden from public view, they share a single self-interested aim: they want to drive Diageo out of the U.S. for their own commercial benefit.  And they are willing to devastate the economy of the U.S. Virgin Islands to achieve their goal.

Let me put this another way so we are all clear: these hidden corporate interests and Puerto Rico politicians are financially and competitively much better off if they can kill the U.S. Virgin Islands initiative and force Diageo to move its rum production outside the U.S.  Puerto Rico and these various corporate interests stand to gain billions of dollars in rum cover-over revenues at the expense of the U.S. Virgin Islands.  That is what they care about.  They don't care if the U.S. loses jobs; they don't care if they wreck the U.S. Virgin Islands economy; they don't care about the harm to U.S. citizens in the Virgin Islands.

That is what the media and Congress should be concerned about.

Neither Diageo nor any other major public corporation wants to be put in the position of having to speak out so bluntly against its critics.  But enough is enough.  We will not stand by while these special interests undermine our corporate reputation and jeopardize the economic future of the U.S. Virgin Islands.

From the beginning of this project, the U.S. Virgin Islands and Diageo have pursued this important initiative openly and transparently.  After extensive public hearings, the U.S. Virgin Islands legislature ratified the agreement.  As the Congressional Research Service reported recently, our agreement followed the letter and the spirit of a 62-year-old federal law designed to help the U.S. Virgin Islands build an economically sustainable future.

As we have demonstrated from the beginning, we are ready and willing to address any questions about our long-term commitment to the U.S. citizens of the Virgin Islands.

In contrast, those seeking to quash the U.S. Virgin Islands initiative have conducted a veiled effort designed to manipulate the U.S. legislative process to upset the agreement – and, defying well-settled precedent, they are urging Congress to reverse the U.S. Virgin Islands agreement retroactively.  To this end, they have conducted a campaign of misinformation directed toward the media and Washington policy-makers.

Last week the National Black Chamber of Commerce and the Florida Black Chamber of Commerce called the Puerto Rican effort a "smear campaign" and we think that is an apt description.

This entire misinformation campaign is built on a fundamental falsehood: that Diageo can be bullied into staying in Puerto Rico.  Let me underscore the truth clearly and directly.  That door has long been closed.  Diageo is not going to purchase rum from Puerto Rico after its current supply agreement terminates.   Everyone knows that.  If the U.S. Virgin Islands agreement is destroyed, we will be forced to leave the United States.  And that is exactly what the leaders of Puerto Rico and their corporate allies want.

We ask the media and leaders in Washington to examine the false claims being made by self-interested commercial parties and Puerto Rico politicians, and recognize the real motivations and forces driving this attack.

We strongly urge the media and political leaders to consider these questions:

(4) "Bacardi cuts 77 jobs at Puerto Rican rum plant." Associated Press 25 April 2009.

(5) open secrets.org http://www.opensecrets.org/lobby/clientsum.php?lname=Conservation+Trust+Fund+of+Puerto+Rico&year=2009 and http://www.opensecrets.org/lobby/indusclient.php?lname=Q11&year=2009.

(6) Invitation to Jan. 28, 2010 fundraiser for Ferre in Puerto Rico listing Miguel Lausell on organizing committee.  Press release from Ferre for Senate attacking Diageo deal.

(7) "Florida Puerto Ricans want island's rum industry protected." Orlando Sentinel. 5 Feb. 2010.

BACKGROUND ON THE U.S. VIRGIN ISLANDS/DIAGEO AGREEMENT

A.  Why the U.S. Virgin Islands-Diageo Public-Private Initiative Is Critical to the U.S. Virgin Islands Economy.

The U.S. Virgin Islands' Daunting Economic Situation:

The U.S. Virgin Islands does not have a diversified economy.  The Territory depends on cyclical tourism and related industries for 80 percent of its economy, and it has little industrial revenue beyond the HOVENSA oil refinery located on St. Croix.

For fifty years, the U.S. Virgin Islands had been unsuccessful in its efforts to attract substantial rum production and access to cover-over revenues Congress provides to the territories for economic stability and, thus, fiscal autonomy.

When Governor deJongh assumed office in 2007, he described the State of the Territory as "troubling," saying, "Our economic situation remains precarious."  The economic problems facing the new Governor were formidable, including:

• The budget was structurally in deficit with general fund expenditures exceeding revenues by $50 million;
• Accumulated debt was $400 million and growing;
• Bonded debt was growing;
• Unfunded pension fund liability exceeded $1 billion;
• Per capita debt was twice that of any state and 30 percent higher than Puerto Rico; and,
• Proposed issuance of bonds to fund the deficit promised to further increase the U.S. Virgin Island's debt burden.

In July 2008, the U.S. Virgin Islands Legislature enacted an enabling law which ratified a contract negotiated by Governor deJongh and Diageo approving a public-private initiative that would result in the production of as much as 20 million proof gallons of rum annually for 30 years or more at a new state-of-the-art production facility located on St. Croix—an unprecedented commitment of time in an untested venue.  

The attraction of a leading global rum brand to St. Croix, for the first time in over a half century, will provide the U.S. Virgin Islands with more than $3 billion in rum cover-over revenue during the 30-year contract term (and perhaps beyond).  The Agreement fully comports with federal law and we stand by our commitment to ensure that the Agreement is fully carried out.  Let me also emphasize that long-standing federal law expressly allows the U.S. Virgin Islands to finance incentives in order to attract rum production.

The Governor's assessment of the U.S. Virgin Islands economy in 2007 preceded the Great Recession.  As one would expect, the U.S. Virgin Islands' economic situation has worsened materially in light of the global recession.  Fitch recently issued a report downgrading U.S. Virgin Islands general obligation bonds.  The rating agency provided the following reasons for its downgrade:

• Fitch's downgrade is due to severe erosion of the Territory's finances in FY 2009 and 2010;
• The Territory's longstanding fiscal challenges have worsened in the current downturn;
• The U.S. Virgin Islands has returned to borrowing to cover operating gaps, which adds further to the U.S. Virgin Islands' liabilities, including outstanding debt and unaddressed employee and retiree obligations;
• Rapid expansion of expenditures has absorbed revenue growth and limited the U.S. Virgin Islands' flexibility to address its liabilities or confront the downturn;
• The U.S. Virgin Islands will be able to manage in the near term, albeit not without actions that delay the U.S. Virgin Islands' prospects for longer-term recovery;
• Net tax collections have plummeted in the recession: FY 2009 collections, initially forecast to grow 17 percent to $854 million, instead fell 36 percent to $470 million;
• Weak tax collections were led by 24 percent lower individual income taxes and 71 percent lower corporate income taxes, tied to performance at HOVENSA during an oil downturn;
• Revenue weakness continues in FY 2010, with the U.S. Virgin Islands forecasting net tax collections of $487 million;
• The U.S. Virgin Islands' liabilities are extremely high.  Tax-supported debt totals about $1.5 billion, equivalent to 60 percent of personal income; including $100 million drawn on the Government's line of credit;
• Persistent underfunding has led to a large pension liability, with an estimated funding ratio of 53.6 percent; a $1.5 billion shortfall that equates to 62 percent of personal income;
• Other liabilities include longstanding negotiated but unpaid salary increases, estimated at $272 million.  

Fitch reports that matching fund revenues attributable to expansion of rum distilling on St. Croix will provide critical economic relief: "Longer-term prospects for matching fund revenue growth tied to expanded rum distillation may provide fiscal stabilization in the coming years."  

Indeed, even the U.S. Virgin Islands' ability to fund current borrowing is dependent on expected rum cover-over revenues: "Interest on the line of credit is secured by gross receipts taxes, with repayment linked to future revenue gains from matching funds tied to the expansion of rum distilling on St. Croix."  

According to Fitch, the U.S. Virgin Islands Government employs nearly 27 percent of the labor force.  If the Diageo/U.S. Virgin Islands Agreement is killed, many U.S. Virgin Islands jobs would be placed at risk.

For over a half century Congress has specifically provided rum cover-over revenues to enable the U.S. Virgin Islands to attain economic stability and fiscal autonomy.  Until the recent public-private initiative, the U.S. Virgin Islands had failed to attract substantial rum production and resulting access to cover-over revenues.  Had Governor deJongh not succeeded in establishing the public-private initiative between the U.S. Virgin Islands and Diageo, the Great Recession might have left the U.S. Virgin Islands in irreparable economic condition.  As the independent Fitch Report demonstrates, the public-private initiative between the U.S. Virgin Islands and Diageo is the economic engine for stabilization of the U.S. Virgin Islands' economy.  

Governor deJongh confirmed the crucial importance of the public-private initiative in his recent State of the Territory address:

Additionally, it should not be overlooked that the expanded rum distillation facilities on St. Croix both diversify the U.S. Virgin Islands' economy and provide a reliable source of government funding, distinguishable from the current cyclical revenue streams provided by tourism and oil refining.  In other words, as Congress intended, the rum cover-over revenues, for which the U.S. Virgin Islands now qualifies, will provide the U.S. Virgin Islands with a reliable measure of economic stability.  Assistant U.S. Secretary of the Interior Tony Babauta recently praised Governor deJongh and lawmakers for having "the foresight and ingenuity to anchor rum production in the V.I. for years to come."  Babauta also said:

Beyond doubt the U.S. Virgin Islands/Diageo public-private initiative is the U.S. Virgin Islands' engine of growth for the next thirty years or more; its unimpaired operation is indispensable to the U.S. Virgin Islands' economic stability.

B. Motives Behind Efforts to Kill the Public Private Initiative.

Puerto Rico's attempt to drive Diageo offshore is designed to preserve Puerto Rico's share of rum cover-over revenues through a Caribbean Basin Initiative formula.  As the Congressional Research Service highlights:

Even though they know that killing the U.S. Virgin Islands Agreement will irreparably damage the U.S. Virgin Islands economy, Puerto Rico politicians and the entrenched corporate special interests supporting them continue to advocate killing the Diageo/U.S. Virgin Islands Agreement to promote their own commercial ends.  Worse, they have promoted killing the Agreement through a campaign of misinformation.  

C. Responses to Misinformation Designed to Kill the U.S. Virgin Islands Agreement.

Those intent upon killing the Diageo/U.S. Virgin Islands Agreement have waged a concerted misinformation campaign.  As stated above, the reasons purported by Puerto Rico politicians and their entrenched corporate allies to kill the Diageo/U.S. Virgin Islands Agreement are deliberately inflammatory but cannot stand the test of truth or analysis.  By way of example:

The claim that the U.S. Virgin Islands "lured" Diageo from Puerto Rico:  A favored assertion among Puerto Rico politicians and their corporate allies is that the U.S. Virgin Islands lured Diageo from Puerto Rico with the benefits provided in the U.S. Virgin Islands Agreement.  This spurious claim could not be further from the truth.  The facts are as follows.  

Diageo does not own or operate a distillery in Puerto Rico.  Instead, Diageo has an agreement with a third-party supplier in Puerto Rico to produce rum for the Captain Morgan brand.  

Diageo alerted its Puerto Rico supplier three years before the supply agreement was to terminate at the end of 2011 that Diageo intended to withdraw upon the agreement's expiration in order to pursue more competitive options.  When it became clear we would not be able to reach an agreement on securing rum supply in Puerto Rico after 2011, we began to explore the option of sourcing rum from other rum-producing venues in the Caribbean Basin, including Guatemala, Jamaica and Guyana.  As an alternative to moving Captain Morgan rum production outside of the United States, we also approached the U.S. Virgin Islands Government to determine whether building a facility there might be a cost-effective alternative that would allow us to remain in the United States.

Talks with the U.S. Virgin Islands Government eventually led to an agreement in which Diageo committed to produce bulk rum at a new state-of-the-art, environmentally advanced distillery on St. Croix for the next thirty years or more.  This type of long-term commitment to produce rum for a leading global rum brand in an untried location for three decades or more is unprecedented.  Diageo agreed to it because the U.S. Virgin Islands Government, using the economic tools that Congress specifically provided, offered Diageo a set of economic incentives commensurate with our commitment to produce rum there for thirty years or more.  What the U.S. Virgin Islands Government accomplished was to persuade Diageo to continue producing Captain Morgan rum in the United States, rather than in a foreign country.  

Claims that the U.S. Virgin Islands incentives are improper:  This claim ignores the fact that, as the Congressional Research Service recently confirmed, "The justification for using tax incentives and subsidies to attract industry has long been a part of sub-federal economic development strategies.  There are numerous examples of states offering manufacturing firms reduced property taxes, access to tax-exempt financing, and favorable corporate income tax policies."  As an example, some of the hardest hit southern states (including South Carolina, Alabama, Georgia and Tennessee) have rebuilt their economies by attracting foreign automakers with financial incentives.  

Even more importantly, these assertions ignore the federal law relative to the rum cover-over program.  The law specifically allows the U.S. Virgin Islands to use rum cover-over revenues to finance incentives as long as the incentives are designed to attract and promote rum production.  The law would prohibit the use of cover-over-financed incentives for other purposes.  In other words, Congress consciously made incentives available for use by the U.S. Virgin Islands by limiting their use to the attraction and promotion of rum production.  

Further, the federal law leaves it up to the U.S. Virgin Islands to determine the type or level of incentives that the U.S. Virgin Islands may offer.  In two separate statutes, Congress made clear that the U.S. Virgin Islands Legislature has exclusive authority to decide how rum cover-over revenues may be spent (for incentives or other purposes).  The Congressional Research Service confirms this: "The limit (on subsidies in the legislation proposed by Puerto Rico) could be seen as inconsistent with the intent of the cover-over as expressed in (legislation and report language) Congress explicitly stated that the government receiving the covered-over revenue was charged with its disposition, not the U.S. Congress."

Most, if not all, of the financial incentives which the U.S. Virgin Islands has made available to Diageo are well recognized features of the local U.S. Virgin Islands statutory Code, as the Congressional Research Service once again confirms: "The legislation…formalizing the agreement with Diageo...includes...statutory incentives the government of the USVI is already providing to support rum production and has expanded to attract Diageo."

Any suggestion that these financial incentives are unusual or improper either is misinformed or is calculated to misinform.  

Both the U.S. Virgin Islands and Diageo have relied upon, and fully complied with, federal and local law in the construction and operation of the public-private initiative.  

Claim against foreign company participation:  Bacardi and its collaborators have attacked Diageo for its British roots even though Bacardi itself is not a U.S. company.  Bacardi is a privately owned Bermuda-based company.  Bacardi, a foreign company, has been the largest recipient of rum tax subsidies from Puerto Rico – including tens of millions of dollars a year in subsidized advertising.

The salient fact is that the U.S. Virgin Islands Government persuaded Diageo not to relocate its rum production outside the United States.  Just as states like Alabama, South Carolina, Tennessee and Georgia have rebuilt their economies by attracting foreign automakers, the U.S. Virgin Islands has successfully structured a public-private initiative that will fuel the U.S. Virgin Islands economy for the next thirty years or more.

The claim that the U.S. Virgin Islands incentives are disproportionate:  Puerto Rican opponents claim that Diageo will receive "disproportionate incentives" over the next thirty years, "more than it cost Diageo to buy the Captain Morgan brand and more than the cost of production."  

This claim misrepresents the size of the production incentives provided by the Agreement and fails to account for the fact that Diageo's eligibility for financial incentives is dependent upon a variety of factors (including levels of production) and is subordinate to other payments to bondholders and the U.S. Virgin Islands Government.  The assertion also fails to distinguish between production incentives and marketing support payments.  In addition to producing Captain Morgan rum, Diageo invests heavily in advertising and promotion of this product.  The U.S. Virgin Islands, which shares an interest in maximizing sales, has agreed to defray some of this marketing expense (as the U.S. Virgin Islands previously had done in its statutory code with respect to rum marketing, and as Puerto Rico has always done as well).

Once again, any suggestion that the production incentives being paid by the U.S. Virgin Islands exceed the cost of production either is misinformed or is designed to misinform.  

Nor are the financial incentives provided by the U.S. Virgin Islands "disproportionate."  In consideration for those incentives, Diageo has made an unprecedented commitment to produce its leading global rum brand in an untried production venue for the next thirty years or more.  The U.S. Virgin Islands had a particular interest in securing this commitment because the U.S. Virgin Islands' objective is to provide long-term economic stability for its citizens.  Diageo originally was not in the market for this type of long-term commitment but, over the course of a lengthy negotiation, was persuaded to commit to thirty years' rum production on St. Croix.  But for the economic incentives, this would not have been possible.  

Inflated jobs claims:  Assertions about purported job losses have varied radically.  The most common assertion has been that Diageo is moving its rum production facility from Puerto Rico to the U.S. Virgin Islands and that, by doing so, Diageo will create 40 minimum wage jobs in the U.S. Virgin Islands while eliminating 400 higher-paying jobs in Puerto Rico.  

These claims are baseless.  They are premised on a false assumption.  Diageo does not own or operate a distillery in Puerto Rico.  Instead, Diageo has an agreement with a third-party supplier in Puerto Rico to produce rum for the Captain Morgan brand.  That supply agreement terminates at the end of 2011.  

Diageo alerted this supplier three years ahead of the contract's termination that Diageo intended not to continue the contract so that this supplier, which produces rums for other brands and has other business interests, could find replacement production.  There is no reason to believe that Diageo's decision will eliminate all, or a major portion, of the jobs in Puerto Rico.  

On the other hand, Fitch has reported that the U.S. Virgin Islands Government employs nearly 27 percent of the labor force in the Virgin Islands.  If opponents succeed in killing the U.S. Virgin Islands Agreement, the U.S. Virgin Islands will be subjected to unsustainable job losses.  

It is noteworthy that Bacardi is participating in the Coalition that is claiming Puerto Rico job losses.  In 2009, Bacardi laid off 20 percent of its workforce – about 77 people – at its Puerto Rico distillery, citing a need to restructure its workforce, including moving jobs to Europe (Puerto Rico jobs lost off-shore).  In fact, what these so-called protectors of Puerto Rican jobs want to achieve is to drive Diageo's rum production off-shore, rather than to the U.S. Virgin Islands, removing the associated jobs away from the United States all together.  

Inaccurate environmental claims:  Puerto Rico politicians and interests have claimed that the Conservation Trust will lose millions of dollars because of the U.S. Virgin Islands Agreement and that the environment in Puerto Rico will suffer.  In point of fact, the U.S. Virgin Islands Agreement is the most positive environmental development involving the U.S. Virgin Islands in many years.

The U.S. Virgin Islands and Diageo are building the most modern, environmentally protective rum distillery in the world, and it is designed to operate with ZERO discharge into the Caribbean.  This will revolutionize the rum business and I challenge any news reporter to take a serious look at the net environmental impact.  (The Fortune Brands Agreement provides for modernized waste water treatment and other environmental enhancements as well.)

This stands in stark contrast to the environmental situation in Puerto Rico, where Bacardi's rum distillery has been out of EPA water quality compliance for years.  The company was fined in 2008 by the EPA for discharging copper, mercury, arsenic and other pollutants in the ocean on a consistent basis over several years.  At that time, Bacardi agreed to pay a $550,000 fine and donate and preserve a wetlands area worth $1 million.  EPA data show Bacardi's distillery has a long history of environmental noncompliance.  

The U.S. Virgin Islands public-private initiative is paving the way toward 21st Century environmental protection in sensitive Caribbean ecosystems.  Governor deJongh has used the cover-over revenues supplied by Congress not only to secure the U.S. Virgin Islands' long-term economy, but also to secure the U.S. Virgin Islands' long-term environmental security.  Puerto Rico should be following this model, not trying to kill it.  

ABOUT DIAGEO

Diageo (Dee-AH-Gee-O) is the world's leading premium drinks business with an outstanding collection of beverage alcohol brands across spirits, wines, and beer categories. These brands include Johnnie Walker, Guinness, Smirnoff, J&B, Baileys, Cuervo, Tanqueray, Captain Morgan, Crown Royal, Beaulieu Vineyard and Sterling Vineyards wines.

Diageo is a global company, trading in more than 180 countries around the world. The company is listed on both the New York Stock Exchange (DEO) and the London Stock Exchange (DGE). For more information about Diageo, its people, brands, and performance, visit us at http://www.diageo.com.

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