It's not entirely outsourced by any means. There is a lot of it. The article is discussing one department that was outsourced, many others are not.

Regarding running their own Linux distro, that probably would be neither cheap or really helpful (which of their vendors would support that vs. some other distro in practice?) but yes, there is a sizeable IT footprint required for such a large place.

Dealing with government contracts, a lot of governments prefer to outsource some activities when the private market can provide these services. The idea is that it makes it easier to fire individual non-performers.