Despite troubled credit markets, sale of bonds to pay for the construction of Diageo’s Captain Morgan Rum distillery on St. Croix successfully closed Thursday in New York, meaning money is in place for construction to start. Gov. John deJongh Jr., whose administration negotiated the contract bringing the distillery to the territory, issued a statement Friday hailing the sale as a "great day for the Virgin Islands."
The V.I. Government largely finances the up-front construction costs of the factory, but expects to recoup the cost many times over through the excise tax remittances. Diageo will get the same molasses subsidy and market support payment arrangement enjoyed by Cruzan Rum, along with Economic Development Commission tax incentives.
In exchange, Diageo would develop, own and operate the plant, commit to making all of its Captain Morgan Rum at the plant for at least 30 years and would be liable for damages if it breached the agreement. The terms of the agreement hold Diageo liable for the bonds if the company defaults on its end of the contract.
After the Senate approved the contract in July, 2008, the Public Finance Authority passed a resolution in October to float up to $250 million in bonds to help finance the project. According to Diageo’s timeline, at least $20 million will be spend on the new factory by the end of the year, with increasing amounts necessary quickly thereafter. Once built, the flow of funds will reverse.
"Diageo’s rum production in the Virgin Islands will generate the only new revenue stream we currently can rely on,” deJongh said. "The approximately $100 million per year we will receive when the distillery produces Captain Morgan Rum not only allows us to borrow now to keep our heads above water during this economic crisis, but long-term provides us with the hope of finally addressing chronic problems like the unfunded liabilities of our retirement system."
The agreement with Diageo is expected to bring roughly $2.9 billion in new excise-tax revenues into the government’s coffers over the three-decade life of the agreement, both government and Diageo officials have said. Rum production is expected to start in 2012, with the distillery producing an average of 20 million-proof gallons each year.