Gov. John deJongh Jr. has sent the Legislature proposed changes to the agreement between Cruzan Rum and the V.I. Government that Government House says would stabilize government subsidies below current levels while encouraging increased production.
The modifications will make it easier for Cruzan to compete in critical markets for bulk rum that have become highly competitive since the original agreement was signed almost three years ago, according to a statement Tuesday from Government House.
According to Government House, DeJongh and the leaders of Cruzan and its parent company, Beam Inc., have agreed to changes in the agreement "which provide for stabilizing the government’s support for bulk rum at levels below current levels."
In exchange, Cruzan has agreed to specific goals for steady increases in production and new branded products that will be labeled as Virgin Islands rum.
Without the changes, Cruzan fears it will lose its competitive position because of changes in the support for bulk rum production elsewhere in the region, according to the statement.
DeJongh’s proposed legislation to enact the agreement says it temporarily modifies the level of support payments "from 18 percent to 25 percent" to promote aggregate rum sales targets and maximize the amount of federal excise tax remitted back to the territory.
The proposed change to the agreement itself, which the administration also provided, are more involved, and deal with financing of bonds for capital projects at Cruzan as well as subsidies provided to the distillery on an ongoing basis.
Under the 2009 agreement, starting this year, the V.I. government is to give an amount equal to 82 percent of the annual gross cover over receipts attributable to bulk rum sales into a fund to pay for Cruzan’s capital projects and its regular subsidies. That would decrease to 80 percent when bulk rum sales exceed five million proof gallons, and to 78 percent when they reach 7 million gallons.
DeJongh’s proposed changes would instead set that at 75 percent until 2018, if Cruzan meets detailed bulk rum sales goal posts, rising from 7.4 million gallons this year to 9.5 million gallons in 2018.
The subsidy for branded rum is nominally unchanged, still dropping from 60 percent of remitted taxes to 54 percent, but adding a series of production goalposts between now and 2018 that Cruzan must meet.
Aggregate rum sales are much larger than subsets of sales, such as branded rum sales, or bulk rum sales attributable to Cruzan, so a set percentage of one subset of sales – 75 percent of bulk rum sales attributable to Cruzan, for instance, would be a smaller percentage of the aggregate total of sales.
“This is an agreement that is both timely for our need for revenue stability and corporate community commitment, and necessary to sustain and strengthen a company that has been our partner for many years," deJongh said in the statement.
"Our goal remains now as it was with our original agreement to achieve a long-term revenue stream to the government for infrastructure investment and general government operations while assuring long-term stability for a company that has seen many changes over the recent years, and whose success is critical to our future."
Cruzan Rum President Gary Nelthropp also praised the proposed changes.
“These mutually beneficial adjustments will give the Cruzan distillery the tools we need to compete in the important bulk rum market while we continue to invest in and grow the Cruzan Rum brand,” Nelthropp said in the statement.