By Christopher McCollum

It was reported several months ago that the producer of Captain Morgan Rum, Diageo PLC (NYSE: DEO), was going to be getting a new factory in the U.S. Virgin Islands, along with $2.7B USD in tax credits and benefits over the next 30 years, which sparked a bit of controversy as they are a British owned company. With this struck deal, Diageo will be moving the Captain Morgan operations from Puerto Rico, where they’ve been operating for generations, to St. Croix in the Virgin Islands, while potentially putting the rum culture in jeopardy.

Puerto Rican representatives claim that this business move will cost Puerto Rico about $120M annually in lost tax revenue, which at this point in time is an even harder pill to swallow than in the past. In March of 2009, Puerto Rico’s governor, Luis Fortuno, declared that the government there is bankrupt, with a deficit of more than $3B USD, making it the highest deficit-per-capita in the United States. Over the ensuing months, there have been plans implemented to lay off potentially 30,000 government workers, and to slash salaries across the board in an effort to save money. Union protests have been going on all over San Juan’s financial districts, and the unemployment rate on the Island of Enchantment will soar to potentially 17%.

Diageo’s decision to move Captain Morgan away from Puerto Rico will not only cause the loss of federal tax revenue, but it will also cut an estimated 300  jobs, putting further strain on families and the local economy. With the desperate times that are ahead for the Rum Capital of the World, this move will hurt perhaps more than we can see at the moment, as there is the added threat that other companies will follow Diageo’s footsteps and seek out the Federal Subsidies that make it so profitable for a company to evacuate to another territory.

To stop the threat of this migration away from Puerto Rico, there has been legislature introduced on Capital Hill that will put a limit to subsidies that can be given to producers of rum. Whether or not it gains traction remains to be seen, but Diageo seems to be preparing for it as they have hired the services of several well known lobbyists, including former United States Senators Trent Lott(R-MS) and John Breaux(D-LA) to lobby for their cause in Washington D.C.

While there appears to be no way to stop Diageo from leaving Puerto Rico for greener pastures (or whiter sands) a little ways across the Caribbean, there can be some hope that this rum subsidies limitation bill will pass through Congress and the Senate, and preserve Puerto Rico as the Rum Capital of the World for generations to come. If not, and other players move away (Bacardi would be a major blow), they could see a loss in tax revenue in excess of $370M USD, combined with Captain Morgan’s departure. It is worth noting that the vast majority of rum taxes go to social welfare programs in Puerto Rico, where almost half of the population is on food stamps. While the GDP is greatly improving, the loss of the rum industries is not quite what Puerto Rico needs right now.

While I advocate a free market, and a business’s right to move locations if it deems necessary, I believe there are also moral questions to be asked, such as whether or not there is an obligation to one’s employees who count on the work to provide for their families, and the community that is invested in and sometimes built around a major industry. By all means, they are free to go in my mind, but I would hope that a sense of humanity would prevail over the desire for a larger profit margin on what is already one of the highest grossing liquor brands in the world.

Cheers, my friends. And here’s hoping that the Rum Capital of the World doesn’t get split up and scattered to the four winds.

Tags: diageo, economy, puerto rico, rum