It is technically a better version of Hotmail. It has no ads, provides better security needed for government usage, restrictions regarding the location of servers and SLAs etc.

In general, all this would probably cost a lot less than the cost of having the services on the premises. As for the comparison with Gmail/Google Apps, I don't know how the comparisons were done there.

[I am a Microsoft employee but I do not represent them. This was mostly from my "common sense"]