Killed the giant rat and used the wheel to open the water dam thing but the water hasn't gone down so i can't progress. Any way to solve this or is there something else i have to do that I missed?

Hmmm, strange. Did you see the water going down? Try using the map to travel to Thaddeus' tower. If so, you should be able to progress back and the boat man along with the water will be gone, allowing you access to the barracks/prison. I don't think there are any other requirements to progress. It worked fine for me at least.

The water came dropping through the roof when i used the valve spanner. I do still have the valve spanner in my inventory, is it supposed to be gone? Tried using the map to go to thaddeus' tower but the water and the boatman are still there. Really frustrating.

Weird. It should work normally and you can progress. Have you tried using the valve again? It should indeed be gone from your inventory. Otherwise I think you should use an earlier save to try it again.