If I tell a designer to recreate Amazon.com's front page as a Photoshop PSD, they could probably do it in under an hour.
If I tell a designer to create the front page of a feature-packed, online store where every tiny decision has a significant impact on sales figures, and the process has to be run past (and work for) countless people within the organisation - no one is doing that in under an hour!
In this case, there's every chance that the actual decision making process was "resize logo or part of logo to fit a small square", but there's also a chance that other options were considered, a couple of meetings were held to get it approved, etc.
I recognize that there can be a lot of government hoops to jump through that can legitimately make it expensive to do business with them, but I don't see why the government had to outsource that to begin with.
I say that because I remember it taking me only a few minutes to go from knowing nothing whatsoever about them to making my own.
1) Draw crappy icon in any of the zillion free icon editors out there (e.g. IconEdit32).
2) Name the file 'favicon.ico' and upload it to the root directory of the website.
I have a feeling I should be doing consulting in the UK or something.