PROJECT SUMMARY
In 2007, U.S. Virgin Islands (USVI) Governor John deJongh was confronted with a difficulty economic situation. Lagging infrastructure development, a decrease in tax revenue, an underfunded government pension system, and rising unemployment were among the problems facing the U.S. Territory.

Governor deJongh’s developed a strategy that involved investing in public-private partnerships that modernize local industries and launch new sectors with growth potential. He and his team brokered two 30-year public-private partnerships in the rum making industry. The agreements will use an economic development program granted by Congress more than 50 years ago to the USVI to create government revenue for the Territory. In turn, the deals will expand rum production capacity and invest in marketing support for two large rum brands. The partnerships are designed to prevent U.S. job loss, enhance business activity, and better enable the USVI government to meet its fiscal obligations.

PROJECT OBJECTIVES
Governor deJongh crafted two public-private partnerships to achieve several objectives. His strategy is to use public-private partnerships to grow local industry, maintain its presence in the USVI, and obtain the revenue it generates. These agreements are aimed at addressing short-term and long–term goals of fiscal stability and economic development in the islands. The government can use the additional revenue to meet its $1.5 billion pension liability, fund infrastructure improvements, reduce layoffs of government employees, and various other activities.

PROJECT DESCRIPTION
Partners
In this case, the government of the USVI is the public sector partner. A U.S. territory located 1,100 miles southeast of Miami in the Caribbean Basin, the USVI is comprised of the islands of St. Croix, St. John, St. Thomas and Water Island and was purchased from Denmark by the United States in 1917.

The private sector partners are Diageo and Fortune Brands. Diageo is the world’s largest beer, wine and spirits company, with a brand portfolio including Smirnoff, Johnnie Walker, Baileys, Tanqueray and Guinness. Fortune Brands is a leading consumer products company with premium brands in distilled spirits, home and hardware, and golf.

Implementation Environment–Legislative and Administrative
On the public sector side, the USVI was tackling many of the same economic hurdles as other states and U.S. jurisdictions affected by the global economic downturn. The USVI has faced challenges such as a 31 percent drop in tax receipts from FY2008 to FY2009, an underfunded government pension system, major infrastructure development needs, and volatility in core industries like rum making, energy, tourism and light manufacturing. Governor deJongh has developed a strategy that invests in brands as a means to growth and utilizes the economic development tools provided by Congress.

On the private sector side, Diageo was searching for a new production location for its Captain Morgan brand. Diageo’s contract with a local Puerto Rican rum maker to supply Captain Morgan expires in 2011. Negotiations to extend the agreement broke down, leading Diageo to consider other destinations. Ultimately, Diageo approached the USVI in 2008, and Governor deJongh crafted a partnership that brings exclusive Captain Morgan production to the territory for the next 30 years.

Following the Diageo blueprint, the USVI entered into a similar agreement with Illinois-based Fortune Brands in October 2009, after Fortune Brands acquired the Cruzan Rum brand. The partnership with the USVI guarantees exclusive production of Cruzan Rum on St. Croix for three decades.

Contract Provisions
The USVI’s partnership agreements with Diageo and Fortune Brands state that both parties are mutually responsible and accountable for the outcome of the deal and are incentivized to work together to achieve their long-term goals. In both deals, the USVI provides traditional tax incentives through packages similar to those offered by other states. However, the unique approach adopted by the USVI involves investing in the durability and success of these rum brands.

The USVI will invest in marketing support for the Captain Morgan and Cruzan Rum brands in exchange for exclusive production rights for 30 years in the USVI. Each deal has specific provisions. For Fortune Brands, the deal includes environmental improvements at the existing Cruzan Rum distillery, including financing of a wastewater treatment facility, as well as plans to expand Cruzan Rum’s production capacity by 50 percent. The USVI will assist Diageo in funding the construction of a distilling facility that similarly aims to reduce environmental harm caused by the production of rum in the Caribbean Basin.

Financial Agreement
Like most states, the USVI has a number of incentives and tax benefits at its disposal; the new partnerships fully leverage the economic development tools provided to the USVI and Puerto Rico by Congress. Both agreements incorporate the rum excise tax “cover-over” program, an economic development program established by Congress in 1917 and extended to the USVI in 1954. This program returns excise tax revenue collected from rum producers on rum made in the USVI and Puerto Rico destined for the U.S. market to the respective U.S. territories. The local legislature determines the most effective use of the “cover-over” funds.

The “cover-over” program returns $10.50 of the total $13.50 distilled spirits tax collected per proof gallon to the territories. In 1999, Congress temporarily increased the “cover-over” rate to $13.25 and has extended that rate ever since when it comes up for a bi-annual vote. As part of the agreements with Diageo and Fortune, the USVI government will return a portion of the cover-over funds to the companies in the form of the marketing support, financing of the new or expanded distilleries and waste water treatment facilities, tax incentives and molasses support so companies can secure the key rum ingredient molasses at a competitive price.

Up front, to fund the specific projects of the deals, the USVI will provide capital through issuance of tax-exempt bonds. These funds will finance the construction of the new Captain Morgan rum production facilities and the expansion of the existing Cruzan Rum distillery. All bonds will be repaid from the companies’ portion of “cover-over” revenues generated from the projects.

The agreement with Cruzan Rum will allow the USVI government to issue up to $75 million in bonds to finance the expansion of the Cruzan Rum distillery. As a result, Cruzan Rum projects an increase in production capacity of more than 50 percent by 2013, resulting in greater potential excise tax “cover-over” revenues for the USVI.

Implementation Metrics
The deals are now fully in effect, with USVI legislative approval granted, ground broken and bonds issued to support construction. After an extensive, transparent public review program and multiple hearings, the USVI legislature ratified the agreement with Diageo in June 2008. The Fortune Brands agreement was ratified in October 2009.

Diageo has begun building a 10 million gallon distillery on St. Croix, with a design footprint for 20 million gallons per year. The first development phase is projected to cost $100 million, plus financing and other costs. Phase two development will begin in 2011 and be completed by 2013, at a cost of $75 million. By 2015, all Captain Morgan rum will be produced on St. Croix, at which time 60-70 direct jobs and hundreds of indirect jobs will be generated. More than 500 jobs will be created during the construction phase (2008-2013).

The partnerships will significantly grow the current $90 million per year generated through the rum “cover-over” program. Rum-tax bonds will fund capital projects and infrastructure. Hundreds of new direct and indirect jobs have already been created during the construction process, and the future revenue that is expected as a result of these partnerships will allow the USVI government to avoid further layoff of government employees.

Commentary
The rum industry has historically been vital to the USVI economy. These new public-private partnerships with Diageo and Fortune Brands offer long-term stability for the industry for decades to come. The agreements pave the way for a steady stream of incoming government revenue through the rum excise tax “cover-over” program. They also give Diageo control of its Captain Morgan production and secure a long-term home for Cruzan Rum in the USVI.

Offering long-term investment in exchange for long-term production and brand exclusivity is a powerful model for public-private partnerships as governments and corporations alike seek to boost employment, stabilize finances, grow value and increase revenue. By locking in similar commitments as automakers, aerospace giants, consumer products manufacturers or technology companies, for example, other states could experience similar economic gains and positive budgetary impact for decades. These types of agreements also play an important role in securing American jobs by giving profitable companies financial incentives to keep their operations on American soil at a time when lower materials, labor and water costs in nearby countries threatened to force both companies to relocate overseas.