Great question for discussion. I will give my ideas backed up by some examples, but I am sure there will be other opinions!
1. Gross human morphology is strongly determined by ancestry, not just from other primates, but from basal placental mammals. Male mammals from seasonal regions tend to maintain their testes internally (or in a very reduced external form) until the breeding season, when the testes undergo rapid growth and they descend. This is a bit like human males going through puberty, except that it is reversible. This means that the testes are well protected without the need for energetically costly additional structures. As animals from a tropical environment we do not benefit from only having active reproductive organs during a brief breeding season (which means they don't need to be as large as animals that breed seasonally because we get more than one chance to deliver the sperm, meaning we need less at any given time). I assume that the selection pressures on having your testes outside the body are relatively low, so we simply haven't evolved a different arrangement.
2. Most vertebrates have a cloaca, which means that all of their waste and reproductive material shares a single exit duct. This is a very efficient mechanism since it requires less developmental input and takes up less space within the organism. The mechanism in humans for segregating reproductive and urinary functions in the penis is very effective. Also, urine is sterile as it exits the body, so it poses no problems, indeed it may help flush out the more infection prone reproductive material that doesn't exit the urethra during reproduction.
I'm sure there are plenty of other suggestions!
Paolo