Wednesday, December 9, 2009

Virgin Islands, Puerto Rico Rumble Over Rum

By David Gauvey Herbert  

Virgin Islands Gov. John deJongh

Updated at 12:22 p.m. on Dec. 9.

It's hard to imagine the Virgin Islands -- of aquamarine waters and calypso drums -- at war, but the U.S. territory has been locked in a rum-fueled brouhaha with neighboring Puerto Rico for months.

The Virgin Islands are punch-drunk after inking a 30-year contract last year with British-based spirits giant Diageo to open a new factory in the territory. Diageo will crank out Captain Morgan rum, generating hundreds of millions of dollars a year in excise taxes and creating new jobs, while the Virgin Islands has agreed to build the company a state-of-the-art processing plant and give them a sweetheart tax deal for the next three decades. (Disclosure: Until recently, Diageo sponsored a semi-regular poll with The Hotline, which is also published by Atlantic Media Co.)

Diageo's Caribbean operations are currently based in Puerto Rico, and San Juan is steamed to see the company (and its tax revenue) go. So upset, in fact, that its non-voting representative in Congress, Resident Commissioner Pedro Pierluisi (D), has tried to scuttle the deal by introducing legislation that would cap the amount of tax subsidies the Virgin Islands can offer Diageo.

Both sides have spent more than $800,000 on lobbying this year alone. The Congressional Black Caucus even weighed in Tuesday, writing a letter to Rep. Charlie Rangel, D-NY, support the Virgin Islands' position.

But Virgin Islands Gov. John deJongh (D) is eager to downplay the dispute. He spoke with NationalJournal.com's David Gauvey Herbert about the origins of the deal, how the Virgin Islands is coping with the economic downturn and why he still loves Puerto Rico.

NJ: There's a sense out there that you lured Diageo away from Puerto Rico with these tax incentives. Diageo disputes that, and you released a statement last month that you want to set the record straight.

DeJongh: The truth is exactly the two things that were said by myself and Diageo, that we did not lure Diageo away from Puerto Rico, and Diageo was leaving -- based on what they've said to us and all indications -- they were leaving Puerto Rico.

We have a very long and historic relationship with Puerto Rico. In fact, on the island of St. Croix, over a third of our population comes from Puerto Rico and particularly from the Vieques area. So there is a very strong relationship between the two [territories]. In fact, the month of October is VI-PR Friendship Month, of which we have Puerto Rican public officials come over and celebrate with us.

NJ: What do you make of the argument that these tax subsidies for Diageo are an abuse of the rum excise program?

DeJongh: I guess my response to that is that I understand the criticism given where it's coming from.... However, there's nothing to indicate at all that we've done anything that is illegal, that's not within the spirit of the law.

Basically Congress said that, considering the Virgin Islands and many of the territories do not have full access to a lot of programs, we're small territories limited in our economic development options, here is a revenue stream that we will provide to you that you can use for economic development purposes. It can be utilized for infrastructure purposes but also for programs to do with health, social needs, educational needs, which is exactly what we've done with it.

NJ: Have you seen the Web site RumBailout.org? It calls you a "new pirate of the Caribbean."

DeJongh: You know, I have to admit to you, I have not actually seen it. I have heard of it, and I've also heard that I am the first photo on it. But I have not seen it. To call me a pirate...

NJ: The Virgin Island Department of Tourism is subsidizing weekend travel packages.

DeJongh: Yes we are.

NJ: How hard has tourism been hit by the downturn?

DeJongh: Tremendously. Overall, and I'm glad you asked that question, we have been hit by a reduction of close to a third of our revenues. However, and this is where our strategy in terms of economic development has come through, what we have done is develop relationships with large companies that in turn can generate activity for us -- whether it be in terms of our business locally or generating traffic....

We've also begun to develop very strong relationships with the cruise industry, ranging from Royal Caribbean, where the largest ship, their newest ship, the Oasis of the Seas, [came] to St. Thomas [Tuesday], to Carnival Cruise Lines and Disney.... We went from no ships coming to the island of St. Croix to where we're now close to 82 calls in St. Croix. Again that's all based on having those relationships.

NJ: What's the status of the proposed gas pipeline to Puerto Rico?

DeJongh: One of the highest cost factors for us of course is energy. We have the third largest oil refinery on St. Croix in the Western Hemisphere. It's 50 percent owned by Hess Oil and 50 percent owned by Pedevesa, out of Venezuela. So a lot of our utility costs are driven by oil prices. Puerto Rico, on the other hand, has a diversified portfolio ranging from some natural gas to wind.

So we have discussed with them on occasion the possibility of looking at a line that would come from Puerto Rico to either St. Thomas or St. Croix but stay within the grid of the Virgin Islands. And right now the Virgin Islands Water and Power Authority and the government of Puerto Rico are discussing that possibility of that -- what it would cost, technically is it possible and when we could do it and how we would pay for it.

So even those discussions are going on. That's why even though we may have this slight disagreement taking place on the one side with respect to this company, we on the other side still have relationships with Puerto Rico, whether it's in terms of our health care lobbying, the Medicaid issues and at the same time with energy.

NJ: So will there be a Virgin Islands-Puerto Rico Friendship Month in 2010?

DeJongh: Without a doubt.

CORRECTION: The original version of this report mischaracterized Puerto Rico and the Virgin Islands. They are territories.