You're one step too far ahead, I'm afraid.
Go down into the sewer-tunnel at the far side of the waterwheel. You need to put that gear up, but you can't. This is the same idea as trying to shift a manual car without putting in the clutch.
Reset the waterwheel by moving the wall in front of it and closing the blades. Then, move the wall back so you can access the sewer-tunnel. Once the gear is up, open the blades again.