Azure Devops self hosted agent with vmss and cloud-init

Question

We use AzureDevops for compiling our code, creating helm charts and docker images. My goal is to come up with a solution to make agents more dynamic so that they can scale as the queue increases.

To solve the above issue I am trying to use self-hosted-agents using a virtual machine scale-set https://learn.microsoft.com/en-us/azure/devops/pipelines/agents/scale-set-agents?view=azure-devops

The scaleset part works fine but one thing I noticed is that when a ubuntu image is installed it doesn't contain docker and dotnetcore. After some research I decided to use cloud init to install these dependencies

#cloud-config
package_upgrade: true

packages:
 - unzip
 - git
 - wget
 - ca-certificates
 - curl
 - gnupg-agent
 - apt-transport-https
 - software-properties-common
 - powershell
 - azure-cli
 - terraform
 - jq
 - npm
 - docker.io
 - nodejs
 - kubectl
 - dotnet-sdk-5.0

apt:
    preserve_sources_list: true
    sources:
        docker.list:
            source: deb [arch=amd64] https://download.docker.com/linux/ubuntu $RELEASE stable
            keyid: 9DC858229FC7DD38854AE2D88D81803C0EBFCD88
        hashicorp.list:
            source: "deb https://apt.releases.hashicorp.com focal main"
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        microsoft-azurecli.list:
            source: "deb https://packages.microsoft.com/repos/azure-cli focal main"
            key: |
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        microsoft-prod.list:
            source: "deb https://packages.microsoft.com/ubuntu/20.04/prod focal main"
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# create the docker group
groups:
  - docker

# Install Docker, for production, consider pinning to stable versions
runcmd:
  - curl -fsSL https://download.docker.com/linux/ubuntu/gpg | apt-key add -
  - add-apt-repository "deb [arch=amd64] https://download.docker.com/linux/ubuntu $(lsb_release -cs) stable"
  - apt-get update -y
  - apt-get install -y docker-ce docker-ce-cli containerd.io unzip wget jq
  - systemctl start docker
  - systemctl enable docker
  # install dotnet
  - wget -q https://packages.microsoft.com/config/ubuntu/18.04/packages-microsoft-prod.deb -O packages-microsoft-prod.deb
  - dpkg -i packages-microsoft-prod.deb
  - apt-add-repository https://packages.microsoft.com/ubuntu/20.04/prod &&  apt-get install dotnet-sdk-3.1 -y

  - curl -L "https://github.com/docker/compose/releases/download/1.29.2/docker-compose-$(uname -s)-$(uname -m)" -o /usr/local/bin/docker-compose
  - chmod +x /usr/local/bin/docker-compose
  - ln -s /usr/local/bin/docker-compose /usr/bin/docker-compose 

# Add default auto created user to docker group
system_info:
  default_user:
    groups: [docker]

Using the above configuration I noticed two things which I would like to solve

1. More urgently I noticed that as the scale-set scales, it starts accepting jobs even before docker and dotnetcore are installed (runcmd part of the script seems to be working), thus failing the build
2. The items under packages: section of the config are not installed

Any ideas on what I am doing wrong?