There is a crowd spilling onto the streets, looking up at a man high above them on a window ledge. Bathed in spotlights, he stands ramrod straight with his back to the window. He shivers rhythmically. Is he a would-be suicide?

Eventually, the police come and take the man down. He is a member of the Gravity Feed company, which works with architectural sites for the design of their performances: startling actions within surreal fabricated landscapes or even on the façades of old industrial buildings. The occasion was the twenty-first birthday of Sydney's Performance Space, a centre for new and experimental art and performance, in 2004.

Performance Space has recently moved to a new home: the CarriageWorks, the redevelopment of the old Eveleigh Railway Workshops. The metalworkers, blacksmiths and boilermakers who kept trains on tracks worked at this massive site for a century, beginning in the late 1880s. By 1879, Sydney's first rail yards at Devonshire Street (now Central Station) were already becoming congested, so the government purchased ten hectares at Eveleigh Street. The following year, work commenced on the Eveleigh Railway Workshops, which were completed around 1887. They operated, using predominantly migrant labour, until 1988; the huge buildings were vacant thereafter.

Some years later, in preparation for the 2000 Olympics, a number of the artists involved in the opening ceremony - including Nigel Jamieson, who recently won the 2006 Sidney Myer Performing Arts Award for his production of Honour Bound - began using the site as a workshop for building sets and creating costumes. Company B, which usually operates from the tiny Belvoir St Theatre, took a ten-year lease on some of the southern bays to establish the short-lived Wilson Street Theatre, which was forced to close after seating collapsed during the Festival of the Dreaming in 1997. Company B kept the space for rehearsal rooms, set construction and wardrobe storage until the lease expired.

For some time, a number of these artists and companies had been lobbying the NSW Ministry of the Arts to adapt the Eveleigh rail yards for use as rehearsal spaces. But it was going to cost a fortune and Sydney - despite, or perhaps because of, its glittering Opera House - has not been kind to its experimental artists. Who was going to make it happen?

In one of those legendary conversations that everyone seems to know something about but no one remembers in detail, Bob Carr, then the state's premier and arts minister, was chatting with the great French theatre director Ariane Mnouchkine. It was January 2002, and bushfires were blazing on the north coast of New South Wales. Carr was flying up to check out the fire-fighting effort, and invited Mnouchkine into the chopper for the flight. As they flew along the coastline, they talked about the Tampa crisis. Mnouchkine expressed her outrage at the federal government's military assault on the asylum seekers. She told Carr that her next work would be an homage to refugees throughout history (it became Le Dernier Caravanserai - The Last Caravan - in 2005). They spoke of the fires, and finally they talked about the state of Sydney's theatre spaces.

Mnouchkine was in town with her celebrated production of The Flood Drummers, for Brett Sheehy's first Sydney Festival as director. It was a spectacular piece featuring 27 performers and a variety of styles: from Japanese Bunraku, with its enormous puppets, to Chinese opera. It needed a very specific sort of theatre space which Sydney, well ... didn't exactly have. The Royal Hall of Industries, historically the venue for Best Pumpkin at the Royal Easter Show, was used. It wasn't exactly ideal for Mnouchkine's company: Théâtre de Soleil is based at the Cartoucherie, an old munitions factory on a sprawling site outside Paris, where work on a massive scale can be developed and presented with relative ease.

The technical manager for the Sydney production was Richard Montgomery, from the Opera House staff. He knew better than anyone that large-scale theatre would never work in Sydney without a dedicated venue. Montgomery arranged for Mnouchkine to meet with Fiona Winning, the artistic director of Performance Space. Winning encouraged Mnouchkine to raise the issue with Carr, a fan. Carr had already been lobbied to turn the Eveleigh site into a railway museum, but had resisted, arguing that there was "no market testing" for this use of the venue, which he described as a "sterile, one-visit" concept. He preferred to see things happening. Mnouchkine left him in no doubt as to what sort of things should be happening at Eveleigh. The fate of the old rail workshops was decided there, in a helicopter.

After the chopper returned to Sydney, things moved quickly. In June 2002, the NSW Ministry for the Arts purchased the site from the State Rail Authority. The local architecture firm Tonkin Zulaikha Greer (TZG) was commissioned to create a performing-arts centre, and in January this year, the CarriageWorks opened for business as a Sydney Festival venue, with two theatres - an 800-seater and a 300-seater - as well as three rehearsal spaces, training rooms, offices and large workshop spaces.

TZG's challenge was to deliver a suitable environment for contemporary performance which nevertheless maintained the site's sense of history. The firm has succeeded: the workshops' enormous red-brick façade still stands as a memorial to a century of hard labour; the use of original walls and metal constructions in the interior design merges an industrial aesthetic with cathedral-like space and light. Queen Anne described Sir Christopher Wren's rebuilding work on St Paul's Cathedral, after the 1666 Great Fire of London, as "awful, artificial and amusing". She meant that it inspired awe, that it was beautifully ornamental and that it was pleasing to the eye. What TZG has produced in the CarriageWorks, a gigantic complex covering nearly 20,000 square metres, provokes a similar reaction.

The CarriageWorks now houses Performance Space, which presents and produces the works of hundreds of artists and experimental-performance companies each year, and it will soon be home to companies such as Stalker, which does most of its work on stilts; Erth, which uses huge puppets and concocts spectacular events, much in the style of Mnouchkine's Théâtre de Soleil; and yes, Gravity Feed - if the cops don't stop them, of course.