For some reason the government isn't willing to pay software developer salaries. It would rather pay a company to pay them instead.

In some countries that is a dream job.

The public servant benefits in vacations, work hours, health support, plus an above average salary as highly educated technician.

That's a logical thing for governments to do. Governments are under pressure on different axes than the companies they contract to do things. Governments switching contracts won't ever make the news, but it's much harder for them to fire people in order to take advantage of increasing efficiencies. Likewise, they cannot short-term employ people easily without this structure.

In most cases its illegal to set up something inside the public org. It needs to be put out as a public offer. It's part of New public management pushed by neoliberal interests.