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4

Applications of Science in the Public and Private Sectors

Joint efforts in basic research have usually been linked, at least conceptually, to long-term aspirations for achieving tangible benefits tomorrow from investments today in science. This chapter considers bioengagement programs designed to facilitate the applications of science in supporting economic and social activities of the two countries, as well as addressing security concerns, in both the near term and the long term. The emphasis is on (a) upgrading science-based services provided by governments and (b) introducing new commercial products developed by Russian institutions as the country tries to more fully embrace a market economy. Both aspects are important to the United States, as well as to Russia, because U.S. organizations are searching for opportunities to play a constructive role in the outreach activities of Russian research and service institutions.

However, in all countries there are many failed attempts for the relatively few successes in introducing into public- and private-sector markets products and services based on development of advanced technology, and particularly biomedical products. With this experience, many U.S. firms have been reluctant to risk investments in an uncertain Russian business environment. At the same time, Russian entrepreneurs have limited experience in determining whether their proposed products and services are better or cheaper than competitive products, both at home and internationally.

In short, Russian entrepreneurs have difficulties convincing potential U.S. partners that eventual payoffs from collaborative activities are worth the financial risks. Unfortunately, Russian business organizations seldom are prepared to take the necessary time, which may extend over several years, to nurture a solid relationship with potential partners from abroad in order to develop and carry out plans that will improve the likelihood of business success. Nevertheless, there are



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4 Applications of Science in the Public and Private Sectors Joint efforts in basic research have usually been linked, at least conceptually, to long-term aspirations for achieving tangible benefits tomorrow from invest- ments today in science. This chapter considers bioengagement programs designed to facilitate the applications of science in supporting economic and social activi- ties of the two countries, as well as addressing security concerns, in both the near term and the long term. The emphasis is on (a) upgrading science-based services provided by governments and (b) introducing new commercial products devel- oped by Russian institutions as the country tries to more fully embrace a market economy. Both aspects are important to the United States, as well as to Russia, because U.S. organizations are searching for opportunities to play a constructive role in the outreach activities of Russian research and service institutions. However, in all countries there are many failed attempts for the relatively few successes in introducing into public- and private-sector markets products and services based on development of advanced technology, and particularly biomedical products. With this experience, many U.S. firms have been reluctant to risk investments in an uncertain Russian business environment. At the same time, Russian entrepreneurs have limited experience in determining whether their proposed products and services are better or cheaper than competitive products, both at home and internationally. In short, Russian entrepreneurs have difficulties convincing potential U.S. partners that eventual payoffs from collaborative activities are worth the finan- cial risks. Unfortunately, Russian business organizations seldom are prepared to take the necessary time, which may extend over several years, to nurture a solid relationship with potential partners from abroad in order to develop and carry out plans that will improve the likelihood of business success. Nevertheless, there are 61

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62 U.S.-RUSSIAN RELATIONSHIP IN BIOLOGICAL SCIENCE AND BIOTECHNOLOGY increasing signs of progress for bioengagement in the private sector, as well as when funding for public-sector activities is available. OVERARCHING EMPHASIS ON GOVERNMENTAL SUPPORT FOR APPLICATIONS OF SCIENCE Joint ventures and other types of private-sector investments have been lim- ited in size and scope. A number of private-sector bioengagement activities have been oriented to achieving near-term payoffs that would benefit segments of the populations of the two countries in discernible ways. This has been an admirable but elusive objective. The marketing of products of research developed at biology-oriented public- sector research institutions began slowly in Russia during the late 1990s. There were few technologies that Russian researchers could offer at competitive prices or with significant quality improvements over imported products and services. Unfortunately, the rhetoric by western optimists as to growing opportunities for commercializing Russian technologies for the new economy raced ahead of mar- ket realities. “Made-in-Russia” was a label that seldom attracted large numbers of potential buyers. Thus, until now, government-supported programs in Russia have usually been an important aspect in the realization of near-term applications of the results of bioengagement. At times, public research institutes have operated like small businesses in selling their products. For example, a research institute in Vladimir has a substantial animal vaccine business that competes with private companies. The institute’s company serves as a conduit to the marketplace for promising research results. Overall, much of the bilateral cooperation on applications of science has focused on three types of activities in Russia: (1) improving services of broad interest to the population that are provided through governmental institutions and scientific centers—in the fields of health, agriculture, and environmental protec- tion; (2) strengthening capabilities of Russian institutions to begin to commercial- ize their technical achievements that would be of interest in the emerging private markets within Russia, and later in the global marketplace; and (3) supporting new components in the research and development (R&D) chain that are important for the commercialization of biomedical, agricultural, and other technologies. New institutional components include the mega-incubator to be located at Skolkovo near Moscow, together with supporting incubators in other cities throughout the country and abroad; the state-owned enterprise Rusnano, which has development of biomedical technologies on its list of priorities; and various venture capital funds in Russia, which are also targeting the biomedical sector. These new entities are intended to attract widespread interest concerning the benefits to both the public and the private sectors in Russia of engaging advanced- technology Russian scientists along with specialists from the United States and

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APPLICATIONS OF SCIENCE IN THE PUBLIC AND PRIVATE SECTORS 63 other countries. (See Appendix F.3 for an overview of Russia’s ambitious plans for developing the pharmaceutical-biotechnology sector.) All the while, U.S. pharmaceutical and biotechnology companies continue searching at home and abroad—with considerable success—for new opportuni- ties to apply scientific findings to development of marketable products. A few international companies have recognized the strong research capabilities of indi- vidual Russian scientists as well as teams of scientists, and they are interested in engaging with selected groups of Russian researchers. However, most U.S. phar- maceutical and biotechnology companies consider investments in other countries to have higher prospects for economic returns during the next decade. Thus, they are concentrating most of their efforts elsewhere. In a few cases, U.S. companies have enlisted Russian partners that have contributed their technical skills in developing the technological basis for market success. Still, applications of biotechnology in the private sector have been in large measure a one-way street. Technology has flowed to Russia from abroad as it tries to stay abreast of international developments. The tangible benefits to the United States have been sparse, limited to the incomes that U.S. companies can earn from selling their products in Russia. Nevertheless, the evolution of the Russian market attracts continued interest of the U.S. private sector. A WIDE RANGE OF PROJECTS This chapter highlights examples of approaches that Russian and U.S. part- ners have pursued to develop technologies that would be of interest to potential users, primarily in Russia. At the same time, Russian, U.S., and other interna- tional companies have been producing and selling a few items based on biological science and biotechnology innovations within Russia. Of course, many interna- tional firms have been vying for sales to the Russian government and regional governments of imported goods and services, while local companies and local entrepreneurs have difficulties winning open and fair competitions at the national, regional, and municipal levels. As emphasized above, they simply cannot offer competitive goods and services. As noted in Chapter 2, more than a decade ago the U.S. government began exploring opportunities to engage Russian partners in conversion of biological production facilities from defense to civilian activities. The only significant effort in this area was the redirection of activities at the previously discussed Sibbio- pharm facility in Berdsk. On a more modest scale, while upgrading physical secu- rity systems at the State Research Center of Virology and Biotechnology Vector, the U.S. government provided limited technical assistance for strengthening the production capability of the associated company Vector-BiAlgam in Koltsovo. The Engelhardt Institute of Molecular Biology in Moscow took a different approach as it expanded its research activities into the public- and private-sector marketplaces. The institute made arrangements with Argonne National Labora-

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64 U.S.-RUSSIAN RELATIONSHIP IN BIOLOGICAL SCIENCE AND BIOTECHNOLOGY tory, and eventually with Motorola and Hewlett-Packard companies, to develop and manufacture biochips that can detect the presence of harmful pathogens— particularly pathogens affecting patients in hospitals. Such biochips have been of interest to international companies for several decades, but the institute was able to add technological innovations to ongoing efforts at the Argonne labora- tory that became commercially interesting. Biochips produced by the institute are now used in Russian hospitals to help identify the causes of various illnesses. (See Box 4-1.) However, large multinational firms continue to dominate markets throughout the world. Taking yet another approach, in the early 2000s, the Department of State (DOS) decided to support several Russian institutions that seemed to have poten- tial for manufacturing products that would be accepted in Russian markets and in markets of neighboring countries. Continuation of research and development activities initially financed by the United States at the institutions was the objec- tive. The program began with a number of educational seminars and training programs. DOS then expanded on these activities as it launched the BioIndustry Initiative discussed in Appendix C.1. Box 4-2 sets forth an important comment by a director of a major Russian institute on the significance of this initiative. This activity helped his institute obtain recognition for Good Laboratory Practices and Good Manufacturing Practices, as a prelude for profitable production of several lines of drugs. Turning to outreach activities of well-established Russian research institutes, the Central Research Institute of Epidemiology in Moscow has developed kits for detecting and characterizing the presence of a variety of diseases, at times with support from U.S. partners (Box 4-3). There are other commercialization successes flowing from joint U.S.-Russian efforts. In some cases, the Russian Foundation for the Support of Small Innovative Firms (the Bortnik Fund) has helped facilitate entry into important markets for joint undertakings. But overall, the number of profitable commercial ventures with long-term Box 4-1 Biochips for Identifying Causative Agents of Serious Diseases With funding from four U.S. and three Russian organizations, the Engel- hardt Institute of Molecular Biology developed an assay that takes 18 hours in contrast to the standard 6–10 weeks. The technology can be used to assess causative agents of TB and MDR-TB, HIV, hepatitis B and C, influenza, and other important diseases. SOURCE: Engelhardt Institute of Molecular Biology, 2011.

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APPLICATIONS OF SCIENCE IN THE PUBLIC AND PRIVATE SECTORS 65 Box 4-2 Building on Cooperative Projects “We are just as interested in maintaining contacts with American special- ists as in financial support from the United States. Interactions of special- ists are very important in staying abreast of developments in the field and in continuing research efforts initiated through the U.S. Government as we begin to sell our products on the commercial market.” SOURCE: Director of former Biopreparat Institute, 2006. Box 4-3 Marketing of Diagnostic Kits The Central Research Institute of Epidemiology, with assistance from American partners through the International Science and Technology Center, established a small enterprise, InterLabService, which now pro- duces kits for testing for the presence of a variety of disease pathogens. Relying on traditional scientific outreaches of the institute throughout Russia and neighboring countries, the enterprise has developed a prof- itable and growing market for its products, which successfully compete with kits offered by other organizations in Russia and abroad. SOURCE: Senior manager of the Center for Molecular Diagnostics, 2011. Also, www.epide- miolog.ru/ and www.interlabservice.ru/en/about/index.php. lifetimes that have emerged from research institutions in Russia has not been great. Financing is difficult. Management skills are in short supply. Security requirements are sometimes severe. Even Russian entrepreneurs who have received recognition for success in commercialization of their discoveries are recording only narrow profit margins. In 2008, DOS launched a limited pilot program to help jump-start small biotech enterprises in Russia. For years, the lack of a vibrant small and medium business sector has been one of the reasons that Russia has not moved in a discernible manner toward its goal of joining the ranks of countries that boast knowledge-based economies. The purpose of the new program was to provide

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66 U.S.-RUSSIAN RELATIONSHIP IN BIOLOGICAL SCIENCE AND BIOTECHNOLOGY loan financing that would enable small Russian companies to take the early steps needed to move into the marketplace. The approach called for a supportive Russian bank to make loans to prospec- tive Russian biotechnology businesses, with DOS guaranteeing repayment of the loans. This approach had been successfully used by the U.S. Small Business Administration in supporting start-up companies in Russia in other fields, such as transportation services and food services, many years earlier. A particularly successful recipient of financial support from the pilot program was the Russian biotech firm Biocad (Box 4-4). Other projects also succeeded in bringing new products into the commercial sector. Unfortunately, however, some projects encountered administrative difficulties, and the program was terminated, at least temporarily. Even though Russia is not accustomed to supporting risky propositions, the approach may deserve reconsideration as a novel way to move products forward. There will be failures. But if products are marketable and prices outweigh costs, there should be some successes. In the agricultural field, Russian institutes and enterprises have had con- siderable success in providing the government and farming organizations with needed vaccines, antibiotics, diagnostics, and other animal medicines. A few firms have developed advanced technologies that have found their way into the marketplace. A good example of such a firm is NARVAC, which has long sup- ported the agricultural community of Russia, at times in cooperation with U.S. partners (Box 4-5). In another initiative, beginning in the mid-1990s, the U.S. Department of Energy (DOE) focused on redirection of Russian defense scientists to new Box 4-4 Loan Financing of a Small Firm Biocad is a small Russian biotech firm established in 2001. It has both R&D capabilities and full-scale manufacturing capabilities. In 2008, it received a loan of $2 million from a Russian bank to expand its manu- facturing activities, with repayment guaranteed by the Department of State. The loan was repaid. In 2010, it had eight drugs on the market in the fields of gynecology, urology, and neurology. Now Biocad is a grow- ing biotech company, selling patented medicines, biological analogs, and generics. In 2011, Biocad allocated $10 million to monoclonal antibodies, with plans to double its investments in 2012. Also in 2012, cooperation began with Pfizer to produce a drug to treat A-type hemophilia in Russia. SOURCE: ISTC, May 2012. Also see Appendix C.1.

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APPLICATIONS OF SCIENCE IN THE PUBLIC AND PRIVATE SECTORS 67 Box 4-5 Serving the Agricultural Community NARVAC, an important Russian supplier of veterinary products, has for many years cooperated with researchers associated with the U.S. De- partment of Agriculture’s Agricultural Research Service. It has developed a strong research and development capability to support its manufac- turing activities, which now produce swine and other vaccines, as well as therapeutics and diagnostics for other animal diseases. As one ex- ample of the payoff from collaboration, NARVAC, working with American scientists, isolated Marek’s disease virus from chicken flocks. These isolates were classified by pathotype (virulence) based on animal in- oculation studies carried out in U.S.-designed Horsfall-Bauer isolation units constructed in Moscow. The chickens were from a pathogen-free flock maintained in Russia. The study provided the basis for an improved pathotyping assay that can be performed easily by many laboratories around the world. A key to this success was a series of reciprocal visits between the collaborating laboratories. SOURCE: American researcher involved in project, 2011. careers. The concept has emphasized the twinning of Russian companies and institutes with U.S. small companies that have comparable interests in specific products. The program, initially titled the “Initiative for Proliferation Prevention,” spawned the United States Industry Coalition (USIC). USIC is a group of small American companies that have been interested in finding partners in Russia and other countries of the former Soviet Union to develop and produce commercially viable products but do not have the connections to initiate programs. With DOE laboratories serving as brokers of initial contacts between interested Russian organizations and members of USIC, partnerships for bringing to market viable technology-based products have been formed with varying degrees of commercial success. Over the lifetime of the program there have been about 150 projects carried out in Russia, with about 30 percent linked to the biomedical sector (Box 4-6). Also, in April 2012, the ISTC reported other successful projects in moving biotechnology achievements of Russian institutions toward the marketplace. Two are noted in Boxes 4-7 and 4-8. Finally, several foundations and nonprofit organizations headquartered in the United States have supported agriculture and health programs in Russia. While funding levels have been modest—usually less than $2 million annually, the

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68 U.S.-RUSSIAN RELATIONSHIP IN BIOLOGICAL SCIENCE AND BIOTECHNOLOGY Box 4-6 Successful Commercialization Projects About 20 percent of the projects financed by DOE can be considered as commercial successes, with a typical project costing about $700,000 over 2 years, including costs incurred by DOE laboratories that assisted in facilitating contacts. The interested U.S. company contributes one-half of the cost in cash or in-kind services. There have been marketable prod- ucts in areas such as use of radioisotopes for medical treatment, rapid diagnostics techniques, drugs, crop protection agents, biodecontamina- tion devices, and wound-healing treatments. SOURCE: U.S. Industry Coalition, February 2012. Box 4-7 Molecular Diagnostics for Mixed Tick-borne Infections The Institute of Biological Instrument-Making, Moscow, working with the Centers for Disease Control and Prevention, developed a diagnos- tic system for detecting antigens of zoonotic infections in the blood of patients and in biomaterial from ixodid ticks, including their main hosts. Simultaneous detection of specific antibodies to agents of several tick- borne infections based on phosphorescence analyses was developed and validated. The approach enabled screening, seroepidemic, and di- agnostic studies. SOURCE: ISTC Annual Report 2011, p. 16, 2012. results have had an important impact in encouraging greater bilateral or national efforts in neglected areas. See Boxes 4-9 and 4-10 for examples of (a) a privately financed initiative and (b) a private initiative that attracted support from the U.S. Agency for International Development. They have played constructive roles in upgrading Russian approaches for providing important services in the medical field.

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APPLICATIONS OF SCIENCE IN THE PUBLIC AND PRIVATE SECTORS 69 Box 4-8 Preclinical Safety, Efficacy Testing, and Technology Transfer of Novel Compounds for Drugs The following organizations have been working together: Center for De- velopment of New Drugs (Orchemed), Institute of Physiologically Active Compounds (Chernogolovka), Medivation (San Francisco), University of California at Santa Cruz, and Tufts University. They have formed one of the few preclinical testing organizations with modern facilities in Russia. They have spawned a consortium of 13 Russian universities and their U.S. partners. They are now promoting promising technologies and sup- port of the Russian pharmaceutical industry. This joint effort has sup- ported presentation of Russian pharmaceutical products in compliance with international quality standards, thereby facilitating their routes to international markets. SOURCE: ISTC Annual Report 2011, p. 15, 2012. Box 4-9 Haemophilus Influenza Research and Vaccination Program In 2010, the Vishnevskaya-Rostropovich Foundation completed studies that showed a significant burden of Hib meningitis in children, in both western Russia and the Far East. The foundation supported vaccination programs in Yaroslavl, the Murmansk regions, and Vladivostok. Over 70,000 children were vaccinated. As a result, the Hib vaccine has been added to the national vaccination calendar, and its administration is now financed by the Ministry of Health and Social Services. SOURCE: Vishnevskaya-Rostropovich Foundation, March 2012. TIME FOR BALANCING THE LEDGER Most examples that are cited above and noted in the appendixes of this report focus on activities in Russia, with the U.S. side usually providing most of the financial resources for covering the direct costs of implementing joint projects. This approach can be traced back to the economic crisis of the 1990s and the pat-

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70 U.S.-RUSSIAN RELATIONSHIP IN BIOLOGICAL SCIENCE AND BIOTECHNOLOGY Box 4-10 Cooperation in Continuing Medical Education With funding from public and private sources, the American College of Physicians, in cooperation with medical education institutions in 13 regions of Russia, has sent 50 highly qualified American physicians to Russia during a 15-year period, where they have interacted with almost 10,000 Russian physicians. This service has increased the capabilities of the Russian physician community to manage serious diseases and reduce premature mortality. The program has also supported travel by 13 groups of Russian physicians to the United States for exchanges of experience. SOURCE: American College of Physicians, 2011. terns that emerged during the economic downturn in Russia. Now the economic situation is different. The character of the bilateral relationship needs adjustment to cost-sharing arrangements if the concept of joint partnerships for mutual ben- efit is to become widespread. Both countries are interested in attracting foreign investors in development of products that can help support economic growth while providing cheaper and better products for sale locally and throughout the world. However, the levels of Russian investments in the biological sciences in the United States and of U.S. investments in Russia are quite small, although they are important in setting the stage for more ambitious efforts. They have often demonstrated a level of mutual interest in developing stronger commercial ties. The governments are working together to encourage foreign investment in both directions by improving the legal and economic frameworks for foreign companies to conduct business in the respective countries. At long last, the issue of membership for Russia in the World Trade Organization has been resolved, and the commercial playing field has to a large degree been leveled. Intensification of engagement activities of companies from both countries is becoming more real- istic. An interesting example of commercial engagement is set forth in Box 4-11. Looking forward, the private sector needs to be a key player in spurring the transition of Russia toward a knowledge-based economy while enabling the United States and other countries to engage more effectively with the latent high-technology expertise in Russia. The Russian government is counting on state-owned firms to play an important role in this transition. As a starting point, several hundred state-owned firms are to provide 5 percent of their sales to sup- port R&D activities in Russia. However, Russian skeptics question whether these

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APPLICATIONS OF SCIENCE IN THE PUBLIC AND PRIVATE SECTORS 71 Box 4-11 Rusnano to Bring New Drug Manufacturing to Russia Rusnano plans to team with U.S. investor Domain Associates in coinvest- ing in about 20 U.S.-based health care technology companies. Rusnano will invest up to $330 million, while Domain’s venture capital funds and other investors will invest a comparable amount. Additional funds will be used to establish a pharmaceutical and medical device manufacturing facility in Russia, where products created by the recipients of Rusnano’s investments will be manufactured. SOURCE: Reuters, March 6, 2012, and Appendix E.5. funds will be used effectively in enhancing the nation’s research capabilities in the near term. Finally, as previously discussed, the Skolkovo Foundation has engaged the Massachusetts Institute of Technology to contribute to the design and establish- ment of a new high-technology university that is to become one of the anchors at Skolkovo, near Moscow. At Skolkovo, Russia hopes to replicate important aspects of Silicon Valley. Strong universities have been important components of suc- cessful technoparks in Russia and in many other countries, although the planned scale of activities at Skolkovo far exceeds similar efforts in other parts of Russia. Biomedical research is one of five key areas of interest. (See Appendix E.4.) Summarizing, the two governments can provide incentives for individual scientists, research teams, and commercial organizations to explore and propose new topics for bilateral cooperation. In principle, cooperation can be a driver of innovation that results in profit, particularly in Russia, where efforts to penetrate international markets have almost always encountered difficulties. Small- and medium-sized companies, in particular, need special encouragement to use their entrepreneurial skills in bringing new products to market. Thus, cooperation will require strong government involvement for years into the future. SIGNIFICANT INITIATIVES The value of applied science to government agencies in both countries and to the general public should not be underestimated. Every day, policy makers, regu- lators, and researchers rely on up-to-date scientific information that affects their responsibilities. Every day the general population awaits the miracle drug, the strength-enhancing nutrient, and the harmless-to-humans repellent of undesirable insects. Thus, cooperation should serve both the public and the private sectors,

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72 U.S.-RUSSIAN RELATIONSHIP IN BIOLOGICAL SCIENCE AND BIOTECHNOLOGY although this chapter has repeatedly highlighted the most difficult portion of the road—commercialization by the private sector. Against this background of both public- and private-sector interest in appli- cations of science, the committee reached two different but equally important conclusions. 1. Private-sector companies in each country, including state-owned Russian companies, will continue to need considerable government incentives to give greater attention to investment opportunities in the other country. Over the years, there have been important examples of investments by U.S. firms in Russia and Russian organizations in the United States in areas other than biotechnology that have paid off for the investors. Lessons learned from these successes should be considered by the governments as they seek to promote international investments in both directions in biotechnology. Several U.S. programs to link Russian research institutions with small U.S. biotechnology firms have been important, and particularly programs supported by DOE. However, protection of intellectual property being developed in Russia and intellectual property being considered for use by U.S. firms in their operations involving Russian organizations will be even more essential with the advance- ment of technologies. Also, the governments can work together to strengthen the legal framework for a business-friendly environment in Russia. Such steps are essential if expanded efforts of the private sector are to result in an increase in profitable undertakings. 2. Cooperative environmental projects are now conspicuously absent from the list of bilateral activities. There are many opportunities to combine efforts in this field. Among the newly emerging tools for conducting assessments of environmental problems are computational toxicology and methodologies for environmental sampling over large wetland areas. Maintaining a stable environment can be a theme that unites scientific efforts of the two countries. While a focus may be on the biological sciences, the involve- ment of specialists from a wide variety of disciplines has become essential in carrying out many types of environmental assessments. The two examples cited above would attract scientists from a variety of specialties. And the long-term results of such activities could enhance the lives of significant segments of the populations in the two countries.