I have no idea why anyone could not apply for a "blue badge" position directly.
If they had skills, they would be chosen. .. otherwise, it is only fair that they are hired on a short term contract until, they can show their skills and then converted to "blue badge".
In many cases, a manager can't get head count for a blue badge, so he gets a red badge. Then after a while, assuming the red badge does a good job, the manager is able to finally justify the permanent spot and gets budget for it. The manager will then write the job description tailored to fit his in-place red badge so that he can do a few interviews of outside candidates to dot his I's and cross his T's, then hires the in-place red badge after a token interview.
However, the in place person runs the risk that someone really qualified that the manager & team likes will interview and then it becomes a risk they will not be converted.
I was converted this way, and I watched more than half a dozen others do the same thing in my BU before I was laid off in the workforce reduction of '11. That BU was converting one red badge per quarter after the hiring freeze in '07. I was told I "had to wait my turn" as there were other red badges who'd been there longer than I was.