The trouble with having it in the inside is that you have to have a smaller tube. If you're trying to make a light, strong tube small enough to fit inside a skinny.. that's getting tricky and expensive!
Given the leverage that the rig weight has on the extension/UJ I'd want something grunty there - especially in waves.

A bigger tube will be stronger.

Sand could get in the top if your sleeve wasn't a tight fit on the mast - you'd want it as close as possible to minimise point loading, but it could also fall out the bottom. You'd have to really bury it in the sand to jam it up. A rubber gasket on the top would help if sand was really an issue? The sand would have to get up the luff tube somehow in order to be able to come back down the grinchstension.. I'm not sure that sand is that smart!

If your line broke, or needed re-threading, you could just pull all of the internals out through the top.

It wouldn't be hard to knock up a prototype on a lathe. The trick will be finding some strong pipe in the right diameter for the outer sleeve. Some of that industrial grade grey PVC would machine nicely and be strong enough for the greenbits. Okay, so green would be better seeing as it would look like the picture, but I don't know if they make it in green!