Kroto suggests an alternative to peer review

My fellow blogger, wavefunction, in his latest post raised an important issue in science: peer-review. He quotes Sir Kroto in his interview in Nature where he suggests that a new system should be put in place instead of 'the most ludicrous ever devised' that will allow money to be awarded by local institutions not the government bodies. The money should be given in three categories:

1. Young deserved researchers
2. Researcher whose most recent report was excellent
3. Researcher who could not be funded in (2) should be allowed to raise matching funding from industries.

Although Kroto must have given a lot of thought to this before suggesting it, I can see many problems with this system:

Who decides who is a 'deserved' young researcher or who had an 'excellent' report and who did not? That would be your peers too, right? Just that they would be peers from the same local institution instead of peers from world over in your own subject area who would have been in a better position to judge your research in the first place.

How will the government decide how much money to be given to each local institution? If every institution is given equal money would that not be unfair on 'better performing' institutions?

Getting rid of proposals? I thought writing proposals was a very important time in a researcher's career not just because the proposal will give him money to continue his research but also it is that time when the researcher thinks the hardest about his work. He thinks about it not only from the perspective advancing knowledge about the subject area but also how his research plays a role in a wider picture of science and society.

The current peer-review system has problems and we acknowledge that. With all due respect to Kroto, this new system needs to be put forth in a more formal manner and needs to address the issues above for the wider scientific community to take seriously.