Having seen such failures in Germany, I think the key reason is that government IT contracting requires two very different skills: Government contracting, and IT. And "contracting" skills are much more important than the latter: It doesn't matter how good your IT skills are, if you aren't good at contracting, you aren't getting the job, but if you're good at contracting, you can get the job, deliver a shitty product, and still make money.

Good IT firms are busy working on free-market projects where they have to deal with 10% of the bureaucracy. It's not worth competing against established players who know how to play the government contractor game much better than you, especially if bidding rules may force the government to pick a contractor that they know will deliver a subpar product because it's cheaper/because their bid is written by someone who knows exactly how to write them.

I suspect that if you want to compete in the market, you need to have a "bureaucracy" team that's at least as big, if not significantly bigger than, your actual software development team. Even in an ideal market that's going to drive prices up.

Edit: It seems like in this case, this quagmire was avoided by having the government build a skilled team in-house, avoiding all the overhead of an army of government bureaucrats interfacing with an army of contractor bureaucrats (which is necessary due to the processes that ensure fair contract awards).